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Benefits of the New Federal Exemptions

by Adam Weiner

Asset Picture 2As previously discussed, Oregon law now allows residents to choose between using the Oregon exemptions or the federal exemptions when filing a bankruptcy.  In most situations, the federal exemptions are significantly better than the Oregon exemptions.  Only if a debtor owns a house with significant equity will the Oregon exemptions be better for the debtor than the federal exemptions.  If you had to pick the single federal exemption that will help the most people, it’s likely the wildcard exemption. That’s especially true for people who either don’t own their own home or don’t have any equity in their home.

What is a “Wildcard” Exemption?

Most exemption schemes—including both the Oregon and federal ones—consist of a list of various types of assets (or property) that can be protected, usually with a maximum dollar amount for each type of asset. Like it sounds, a “wildcard” exemption can be used to protect any of your assets that are not protected already by another exemption. Depending on 1) the amount of the “wildcard” exemption and 2) how flexibly it can be used, it can make a huge difference because it can protect assets that the rest of the exemptions either don’t refer to at all or the dollar amount for that type of property is too low.

The Oregon vs. Federal Wildcard Exemptions:

The federal wildcard exemption is so much better than Oregon’s because 1) it’s many times larger, especially when increased by the unused homestead exemption “spillover, and 2) it can be flexibly “stacked” onto other exemptions.

The Oregon wildcard exemption is $400, which is doubled to $800 for a joint bankruptcy filing by a husband and wife. The federal basic wildcard exemption is $1,225, doubling to $2,450 for joint filers.

“Spillover” Allowed to Increase Federal Wildcard Exemption:

But these federal wildcard amounts—already more than three times as large as the Oregon ones—are hugely increased if you do not use your homestead exemption (i.e., exemption for your house), or not all of it. Whatever portion of the homestead exemption that you do not use can “spillover” onto the federal wildcard exemption, up to a maximum of $11,500 per person. This means that the federal wildcard exemption can be as large as $12,725 per person ($1,225 + $11,500), or $25,450 for joint debtors.

“Stacking” Allowed with Federal Exemptions:

These comparatively large amounts on the federal side—potentially $12,725 per person vs. only $400 for the Oregon wildcard—would not be nearly as helpful if the federal wildcard had an “anti-stacking” restriction like Oregon does. The Oregon statute on the wildcard exemption states that “this exemption may not be used to increase the amount of any other exemption.” That means that even as small as the Oregon wildcard exemption is, it can’t be used to provide greater protection to any asset that has a designated exemption. In total contrast, the federal wildcard exemption can be used for this kind of added protection.

An example will make this clearer. Assume a debtor owned a vehicle free and clear worth $10,000, does not own a house or owns a home that has no equity (the amount of the mortgage(s) exceed its value), and everything else the debtor owns (furniture, clothing, jewelry, household and personal items) is worth less than the applicable exemptions.

Under the Oregon exemptions, the debtor would be entitled to a $3,000 vehicle exemption, leaving the remaining $7,000 of equity unprotected. Even the wildcard exemption of $400 could not be “stacked” onto that for a bit more protection. Under Chapter 7, the debtor would have to pay the bankruptcy trustee about $7,000 to keep her vehicle (or the debtor could surrender the vehicle to the trustee and the trustee would give the debtor $3,000 when the car is sold at auction). If the debtor wanted to keep the car, but couldn’t afford to pay the non-exempt amount over a 10-month period, the debtor could file a Chapter 13 case to pay the non-exempt amount over three to five years. 

But now under the newly available federal exemptions, besides being entitled to a larger $3,675 federal vehicle exemption, the debtor could “stack” the federal wildcard exemption onto this vehicle exemption. Since the debtor doesn’t have any equity in her home and doesn’t need the homestead exemption, $11,500 can “spillover” onto the usual $1,225 wildcard exemption, for a total $12,725 wildcard. That added to the regular $3,675 vehicle exemption is more than enough to cover her $10,000 vehicle. Thus, this debtor can file a Chapter 7 case and have her vehicle protected without worry.  Indeed, if a debtor did not need to use the federal wildcard exemption on any other assets (because the debtor’s other assets were under the applicable exemptions for that category), then the debtor could exempt up to $16,400 for the equity in a car.  And this is a substantial increase from the Oregon exemptions that only allow a $3,000 exemption for the equity in the car.  (Of course, this analysis could apply to other assets that the debtor may own, and doesn’t just apply to cars.)  Thus, thanks to the new federal exemptions, it has now become a lot easier for debtors to protect all of their assets in a bankruptcy filing. 

As always, this information is not meant to give specific legal advice and it is highly recommended that you speak with an experienced bankruptcy attorney in Portland to discuss the specifics of your situation.  I am happy to meet with you and discuss your situation.

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