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What are bankruptcy exemptions?

In last week's post, we discussed some of the advantages of filing a Chapter 7 bankruptcy at the first sign of financial distress rather than waiting to file. One of the reasons a Massachusetts resident should consider filing for bankruptcy before selling off a lot of his or her property is that by filing for bankruptcy, he or she can more easily take advantage of bankruptcy exemptions.

An exemption is, as the name applies, a legal right to set aside a piece of property as "exempt" from creditors. Even if a creditor has the legal right to start seizing a debtor's property to pay a debt, the creditor cannot touch "exempt" property.

While a Salem debtor is free to claim an exemption under Massachusetts law even outside a bankruptcy, it is usually a lot easier to claim an exemption in the context of a Chapter 7 bankruptcy since it is simply a matter of noting that the property is exempt on the bankruptcy form. Although Massachusetts law allows debtors also to use exemptions established by federal bankruptcy law, some of the state exemptions can go a long way in helping a debtor get a fresh financial start without losing the shirt off of his back in the process.

For example, Massachusetts law allows a person to keep a significant amount of equity in his or her home. Those who rent can set aside up to $2,500 a month to keep paying rent even during and after the bankruptcy. A debtor is also allowed to keep up to $2,500 in cash and other savings and most of his or her wages. Debtors in Massachusetts who are receiving government benefits are allowed to keep them.

Exemptions are a concept that balances an honest creditor's right to repayment against an honest but unfortunate debtor's ability to maintain a reasonable standard of living. Massachusetts residents who need to file bankruptcy ordinarily should not hesitate to use exemptions to their advantage.

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