Virginia Bankruptcy Exemptions and Law
Contrary to what many believe, the purpose of bankruptcy is not to punish people for losing control of their debt. It is actually intended to help people who have more debt than they can pay off by protecting them from creditors and bill collectors while they sort out their financial affairs. You may need to give up some of your property/assets during the bankruptcy process, but when you exit bankruptcy you should be free from most of your debt and ready to get on with your life.
Bankruptcy proceedings are conducted in federal court under the rules laid out in the U.S. Bankruptcy Code. However, the Bankruptcy Code allows states to create their own rules regarding what property residents can protect from creditors so they do not lose all of their assets in bankruptcy. Virginia has chosen to enact its own bankruptcy exemptions.
In Virginia, you will have the choice of using the bankruptcy exemptions provided for in federal law and those provided by state law. You are free to choose either set of exemptions, but you will need to use whichever one you choose for all of your exemptions. You will not be allowed to pick and choose on an exemption-by-exemption basis. More on this below. To understand the exemptions, it's first important to understand the basics of bankruptcy.
Chapter 7 vs. Chapter 13
Property exemptions do not play a role in all personal bankruptcies, only those conducted under Chapter 7. The other type of personal bankruptcy is Chapter 13 bankruptcy, where you can often keep most of your assets.
Chapter 7 bankruptcies are also known as “liquidation" bankruptcies because you must turn over all of the property not protected by an exemption to a bankruptcy trustee. The bankruptcy trustee will then sell the property and use the proceeds to repay your creditors.
In return for giving up your non-exempt property, you will exit Chapter 7 bankruptcy free from nearly all of your debts. Unfortunately, not everyone who declares bankruptcy can take advantage of Chapter 7. You will need to show that your income is low enough to qualify.
Chapter 13 bankruptcy lets people who have a steady income reorganize most of their debt and pay it off over three to five years under a court-approved plan that may also eliminate some of your debt. Chapter 13 is popular with homeowners because they can often keep their homes.
The Automatic Stay Protects You From Creditors
Regardless of whether you file for bankruptcy under Chapter 7 or Chapter 13, the court will issue an automatic stay when you file. The automatic stay is a powerful tool that will force creditors to stop trying to collect their debts while you are resolving your financial issues through bankruptcy.
The automatic stay will stop almost all collection activity against you, including foreclosures and lawsuits. If a creditor contacts you in an attempt to collect payment while the stay is in place, the court can force it to pay damages, including attorneys' fees.
Secured vs. Unsecured Debt
Not all debt is treated the same during bankruptcy and it is helpful to understand the different types of debt and how they will be treated. As a general rule, when you declare bankruptcy your debt will be categorized as either secured or unsecured. How your debt is classified will often determine how much you can eliminate through bankruptcy.
You have unsecured debt when your creditors cannot seize your property when you fail to pay them. Credit card debt, court judgments, and medical debt are among the most common types of unsecured debt.
Because your unsecured creditors have no collateral for their debts, it is the most likely to be eliminated in bankruptcy. But some priority unsecured debts, like child and spousal support, cannot be discharged.
When debt is secured, a creditor can repossess your property if you fail to pay them what you owe. Most secured debts are part of a loan transaction where you signed a contract that gave the lender the right to seek a lien on the property that you put up as collateral if you don't repay your loan. Home mortgages and car loans are the most common types of secured debt.
Filing for bankruptcy may force secured creditors to postpone their collection activities for a time, but most secured debt cannot be discharged in bankruptcy. This means you will likely need to either give up the property or work out a payment plan with the creditor.
Secured and Unsecured Debt in Bankruptcy
When you file for bankruptcy under Chapter 7, you can often discharge most of your unsecured debt. However, your secured debt can rarely be eliminated, leaving you with three options:
- Returning the property to the creditor. You will lose the property, but you can usually stop paying the creditor.
- Keep the property and continue making payments. This is only possible when a state exemption covers the amount of equity you have in the item.
- Purchase the property outright. This almost never happens in Chapter 7 because those who meet the chapter's income requirements rarely have the money to purchase their property.
In Chapter 13 bankruptcy you create a plan to repay your secured creditors over three to five years. The court must approve the plan and creditors may be forced to reduce or restructure your debt. Mortgage payments are not included in the plan, so you need to continue making those payments to your lender outside of bankruptcy.
Your unsecured Chapter 13 creditors are paid with the disposable income left over after you have made the required payments to the secured creditors. Any unsecured debt not repaid by the time the plan finishes will be eliminated.
You will only be allowed to file for Chapter 7 bankruptcy if you can show that your income is under certain thresholds.
The easiest way to qualify is by demonstrating that your household income is less than the median household income for Virginia households of the same size. For example, if you live in a three-person household, you would need to earn less than $97,056, which the U.S. Census Bureau says was the median income for a three-person Virginia household as of November 2020.
If your household income is more than the state median, you may still qualify to file under Chapter 7 if you can show that you have little to no disposable income each month. This is done by subtracting your estimated monthly expenses from your monthly income.
There are also eligibility requirements for filing under Chapter 13. To file under that chapter, you will need to show that you have a steady income, unsecured debt of less than $419,275, and secured debts of no more than $1.26 million.
The Virginia bankruptcy exemptions may be used by anyone filing in the state. The property that falls within the exemptions can be protected from creditors and used to start over once you have completed bankruptcy.
When you file for bankruptcy with your spouse in Virginia, each of you can often claim the full exemption if you own the property together. This basically allows you to double the exemption.
Virginia made some significant changes to its homestead exemption in 2020. Previously, you could exempt up to $5,000 of your equity in real estate or personal property ($10,000 if you are over 65), plus $500 for each dependent. The new legislation kept those provisions in place but added a new $25,000 principal residence exemption.
Under the new exemption system, if you are under 65 and file for bankruptcy and have two dependents, you can take a homestead exemption of up to $31,000 (the $5,000 original exemption, plus $500 for each dependent, plus the new $25,000 exemption). If you are over 65, the exemption amount increases to $36,000 (the original $10,000 over 65 exemption, plus two $500 dependent exemptions, plus the new $25,000 exemption).
To claim the homestead exemption, you will need to file a homestead declaration with your county recorder before filing for bankruptcy.
Any portion of the homestead exemption that you did not use to protect the equity in your primary residence can be applied to your other property.
For example, if you only used $20,000 of your $30,000 homestead exemption, you could apply the remaining $10,000 to any other property. That also means you could apply the entire $30,000 amount to other property if you did not use any of the exemption on your principal residence.
Virginia allows you to exempt the larger of 75% of your weekly earnings or 40 times the federal minimum wage. The judge may allow low-income individuals to keep more of their income.
Motor Vehicle Exemption
You can exempt up to $6,000 of the equity you have in a motor vehicle.
Personal Property Exemptions
The following personal property exemptions are available in Virginia:
- Up to $5,000 in household furnishings
- Up to $5,000 in family heirlooms
- Up to $1,000 in clothing
- Your wedding and engagement rings
- Animals owned as pets
- Health aids
- Up to $3,000 in firearms
Tools of the Trade Exemptions
Virginia provides an exemption of up to $10,000 in value for the tools, equipment, machines, and books you need to pursue your trade or occupation. The exemption may be applied to motor vehicles, boats, and aircraft that are necessary to pursue your trade.
Farmers receive additional exemptions, including:
- Up to $3,000 for a tractor
- Up to $1,000 in fertilizer
- One wagon or cart
- A pair of horses or mules
- Two plows
- Certain hand tools
Finally, if you are a member of the military, you can exempt your arms, uniforms, and equipment.
Insurance Benefits Exemptions
The state provides the following exemptions for insurance:
- Most life insurance policies
- Benefits paid as the result of an accident, sickness, or industrial illness
- Group life or accident insurance policies for government officials
- Fraternal benefit society benefits
- Burial society benefits
Pension and Retirement Exemptions
Most pension and retirement plans are exempt in Virginia, including:
- Up to $17,500 per year in benefits from tax-exempt retirement accounts such as 401(k)s, IRAs, and defined benefit plans
- City, town, and county employee plans
- Plans for state employees and judges
Public Benefit Exemptions
Virginia provides exemptions for the following public benefits:
- Social Security benefits
- Unemployment compensation
- Workers' compensation
- Crime victims' compensation
- Aid to the blind, aged, disabled, and families with dependent children
- Necessary spousal and child support payments
- Business partnership property
Need Help Filing for Bankruptcy in Virginia?
Filing for bankruptcy on your own is often a complex and bewildering process. There are specific rules that you must follow and you will sometimes need to negotiate with your creditors. While judges are often patient with pro se filers, your creditors will expect you to comply with all of the relevant rules and procedures. Failing to do so can result in your case being dismissed.
We recommend seeking the assistance of a local bankruptcy attorney. A qualified lawyer will help guide you through the bankruptcy process and ensure that you keep 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.
Frequently Asked Questions About Virginia Bankruptcy
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