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Connecticut Bankruptcy Exemptions and Law
If you are a Connecticut resident and in debt over your head, bankruptcy could protect you from creditors while you pay off or eliminate your debt. Bankruptcy offers people an option for ridding themselves of overwhelming debt and starting over without worrying about being harassed or sued by bill collectors. Additionally, Connecticut has state laws in place that let residents protect some of their assets from creditors during bankruptcy.
The U.S. Bankruptcy Courts are federal courts governed by the U.S. Bankruptcy Code. However, federal law allows states to write their own laws regarding what property their residents can protect from creditors. Connecticut has chosen to implement its own rules on exempt property, which is property you can keep to help you get on with your life after bankruptcy.
Connecticut will also let you choose between the federal exemptions in the Bankruptcy Code and its state law exemptions. You are free to choose the system that works best for your financial situation, but you will need to stick with one system because you can't pick and choose on an exemption-by-exemption basis.
To better understand the role exemptions play in the bankruptcy process, it helps to be familiar with the two types of personal bankruptcy:
- Chapter 7 bankruptcy is sometimes known as “liquidation" bankruptcy because you must turn over the property you cannot protect with an exemption to a bankruptcy trustee who will sell it and use the proceeds to pay your creditors. Exemptions can play a large role in Chapter 7 filings because you will often lose much of the property that is not covered by an exemption (though you will see below that a lot of your property is exempt). In return for giving up your nonexempt property, you will usually exit bankruptcy free from nearly all of your debt. But you must first meet strict income thresholds to qualify.
- Chapter 13 bankruptcy lets people who have a steady income reorganize most of their debt and pay it off in three to five years. The payments are made under a court-approved plan that usually eliminates some of your debt. Chapter 13 is popular with homeowners because they can often keep their homes.
One of the most important benefits you will enjoy if you file under either chapter is the automatic stay issued by the court when you file. The stay stops almost all creditor collection activity, including foreclosures and court cases. This prevents collection agencies from harassing you and gives you the breathing room you need to resolve your debt problems.
Secured vs. Unsecured Debt
When you declare bankruptcy, your debts will usually be categorized as secured or unsecured. The designation is significant because the two types of debt are treated differently in Chapter 7 and Chapter 13, which will dictate how much debt you can eliminate.
Debt is considered to be unsecured when a creditor has no right to repossess your property for failure to pay. Credit card debt, court judgments, and medical debt are among the most common types of unsecured debt.
Since your unsecured creditors hold no collateral for their debts, unsecured debt is the most likely to be eliminated through bankruptcy. But some priority unsecured debts, like child and spousal support, can't be discharged in bankruptcy.
A secured creditor has the right to repossess your property if you do not repay what you owe. Secured debt is often the result of a loan transaction where you signed a contract giving your lender the right to seek a lien on the property you put up as collateral if you don't pay.
Since secured creditors retain their right to repossess the property in bankruptcy, you will usually need to give up the property or work out a payment plan with the creditor. Home mortgages and car loans are the most common types of secured debt.
How Secured and Unsecured Debt Work in Bankruptcy
When you file for Chapter 7 bankruptcy, you can usually discharge most of your unsecured debt. However, secured debt is treated differently and can rarely be eliminated in a Chapter 7 case. Usually, you will need to choose from one of the following options:
- Return the property to the creditor. If you choose this option, you will lose the property, but you will usually be free from making additional payments.
- Keep the property and continue making payments. This is sometimes possible when a state or federal exemption covers your equity in the item.
- Purchase the property outright. This is rare in Chapter 7 cases because filers usually have little cash and are usually required to turn over most of their assets to the trustee.
Chapter 13 bankruptcy lets you create a plan to repay your creditors over three to five years. The court must approve your plan and may force creditors to reduce or restructure your debt. Your mortgage payments will not be included in the plan, but the trustee may negotiate a payment agreement with the lender if you are behind on your payments.
In Chapter 13, unsecured creditors are paid with the disposable income that is left over after you have repaid your secured creditors. Any unsecured debt not paid under the plan is discharged when the plan has finished.
To file under Chapter 7 in Connecticut you must show that your income is low enough to qualify. This is usually done using one of two means tests.
The first means test is simple: If your household income is less than the median household income for similarly sized households in your state, you qualify. For example, U.S. Census data shows that the median income for a three-person household in Connecticut was $102,282 in November 2020. That means if you live in a three-person household that has less than $102,282 in income, you will qualify to file under Chapter 7 in Connecticut.
If your household income is above the Connecticut median, you can still qualify under Chapter 7 based on your disposable income. Your monthly disposable income is calculated by subtracting your monthly expenses from your monthly income. If the calculation shows that you have little disposable income each month, you can file under Chapter 7.
To file under Chapter 13 you will need to show that you have a steady income and unsecured debt of no more than $419,275. Your secured debt can't total more than $1.26 million.
Connecticut's exemption system may be used by anyone filing for bankruptcy in the state. If your property falls within one of the exemptions, you can protect it from creditors during bankruptcy and use it to start over when you are finished.
When a married couple files for bankruptcy together in Connecticut, each spouse is usually allowed to claim a complete set of exemptions. In essence, if you file for joint bankruptcy with your spouse, you will be allowed to double most state exemptions if you own the property together.
Connecticut lets you exempt up to $75,000 of the equity you have in the home you occupy when you file for bankruptcy. If you and your spouse own the home together and file for joint bankruptcy, that amount doubles to $150,000.
The homestead exemption applies to the equity you may have in real property, a manufactured home, or co-op.
The greater of 75% of your weekly wages or 40 times the minimum wage is exempt.
Personal Property Exemption
Connecticut is one of the few states that does not financially limit the amount of personal property you can exempt from bankruptcy. The following qualify for the personal property exemption:
- Wedding and engagement rings
- Necessary health aids
- Burial plot
- The insurance proceeds paid for damage to exempt property
- Spendthrift trusts that are necessary to support you or your family
Motor Vehicle Exemption
You can exempt up to $3,500 in the equity you have in a motor vehicle.
You can apply the $1,000 wildcard exemption to any property you own.
Tools of the Trade Exemption
Connecticut completely exempts the tools, books, and farm animals you need to pursue your trade. Additionally, the animals and livestock reasonably necessary to run a farm operating as a partnership is exempt when at least 50% of the partners are from the same family.
Insurance Benefits Exemption
The following insurance benefits are exempt:
- Some life insurance proceeds and unmatured life insurance contracts
- Health or disability benefits
- Fraternal benefit society benefits
Pension and Retirement Exemptions
Most pension and retirement plans are exempt in Connecticut, including:
- Tax-exempt retirement accounts such as 401(k)s, IRAs, and defined benefit plans
- State and municipal employee plans
- Teacher plans
- Plans for probate judges and employees
Public Benefit Exemptions
The following public benefits are exempt in Connecticut:
- Social Security benefits
- Unemployment compensation
- Wages from an earning incentive program
- Crime victims' compensation
- Veterans' benefits
- Aid to the aged, blind, disabled, or families with dependent children (AFDC)
- Alimony to the extent wages are exempt
- Child support
- Business partnership property
If you are filing for bankruptcy anywhere in the U.S. you must first complete a counseling course within 180 days of filing. The course is designed to help you assess whether you can pay your debts outside of bankruptcy.
If you plan to file under Chapter 13, you may be asked to prepare a repayment plan to file with the court. You must file a course completion certificate along with your bankruptcy filing.
When you file without an attorney, you will begin the bankruptcy process by finding and downloading the correct forms for the U.S. Bankruptcy Court for the District of Connecticut. The instructions included with the forms will let you know which additional forms and documents must accompany your petition.
It will cost you $338 to file for Chapter 7 bankruptcy in Connecticut and $313 to file under Chapter 13. The fees are the same if you represent yourself (known as appearing “pro se") or if you hire an attorney. If you can't afford the filing fee, you can ask to pay in installments over 120 days. If you earn less than 150% of the poverty line, you can request that the fee be waived.
Most people who file for bankruptcy choose to be represented by a lawyer. While each bankruptcy case is unique and fees can vary depending on where you live in the state, most Connecticut bankruptcy lawyers will charge between $1,000 and $2,000 for a fairly straightforward Chapter 7 case. Since Chapter 13 cases are more complex, attorneys will often charge between $2,500 and $3,500 for a routine case. However, if your case is complicated, the fee can be much higher.
Need Help Filing for Bankruptcy in Connecticut?
If you are having trouble paying your bills, hiring an attorney to represent you in bankruptcy may seem like an expensive luxury when you could file on your own. However, even simple bankruptcy cases can involve complex court filings and meeting strict deadlines. An experienced local bankruptcy attorney will help guide you through the filing process, represent you in court, and negotiate with creditors to ensure that you retain as many of your assets as the law allows.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.