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Washington Bankruptcy Exemptions and Law
If you are a Washington state 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, Washington has enacted state laws that let residents protect some of their assets from creditors during bankruptcy.
Federal law, specifically the U.S. Bankruptcy Code, governs bankruptcy. However, states often write their own laws regarding what property their residents can protect from creditors, and Washington has chosen to create its own rules regarding what property you can keep in bankruptcy.
Washington allows you to choose between the Bankruptcy Code and state law exemptions. However, you will need to stick with one system because you cannot pick and choose on an exemption-by-exemption basis.
What property you can keep depends on the type of consumer bankruptcy you file. There are two types of consumer bankruptcy:
- Chapter 7 bankruptcy, or "liquidation" bankruptcy, has you sell off non-exempt assets to pay your creditors. However, exemptions can play a large role in Chapter 7 cases because much of your property is protected. In return for giving up your nonexempt property, you will usually exit bankruptcy free from nearly all of your debt. You must also meet income requirements to file Chapter 7.
- Chapter 13 bankruptcy, or "reorganization" bankruptcy, lets people who have a steady income reorganize most of their debt and pay it in as much as five years. The payments are made under a court-approved plan that usually eliminates some of your debt. Chapter 13 is popular with people who have enough income to pay off their debt with a little help and want to keep their home and other property.
One of the most important benefits you will enjoy if you file under either chapter is an 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
Credit card debt, court judgments, and medical debt are among the most common types of unsecured debt. Essentially, any debt you have where the creditor does not have the ability to take your assets if you fail to pay is unsecured. Unsecured creditors have less negotiating power in bankruptcy, and you can often eliminate most or all of your unsecured debt in bankruptcy. However, some priority unsecured debts, like child and spousal support, can't be discharged.
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 that you put up as collateral if you don't pay. A typical example is a car loan: If you don't pay your car payments on time, the bank can take back (repossess) your car.
Because secured creditors retain their right to repossess their collateral in bankruptcy, you will usually need to give up the property or work out a payment plan with the creditor.
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 unless it is exempt (protected). Fortunately, in a lot of cases your property may be protected.
In a Chapter 13 bankruptcy, on the other hand, the court must approves a plan to repay these creditors. As part of the bankruptcy, the court may force creditors to reduce or restructure your debt, for example by reducing interest. If you want to keep your home you will need to continue making mortgage payments outside of the plan, but a Washington bankruptcy attorney can help you 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 Washington you must pass 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. In Washington, the household median income was $98,730 as of November 2020. That means that if you live in a three-person household that has less than $98,730 in income, you will qualify for Chapter 7.
If your household income is above the Washington median, you can still qualify under Chapter 7 based on your disposable income. Your monthly disposable income is the amount left over after you pay essential bills. If you have little or no disposable income each month, you can file under Chapter 7. If, however, you have money left over after paying your essential bills you may not qualify.
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.
Washington's state exemption system may be used by anyone filing for bankruptcy there. If your property falls within one of the exemptions, you can protect it from creditors whether it is secured or unsecured debt.
When a married couple files for bankruptcy together in Washington 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.
Washington will let you exempt up to $125,000 of the equity in your principal residence. That doubles to $250,000 if you and your spouse both own the home and file for bankruptcy together.
You can apply the homestead exemption to personal property in which you reside, but in that case it is limited to $15,000.
You can exempt up to 75% of your weekly disposable income or up to 35 times the federal hourly minimum wage each week, whichever is greater.
Motor Vehicle Exemption
Washington allows you to exempt up to $3,250 of the value of one motor vehicle. If filing jointly, your spouse is allowed to exempt the value of an additional motor vehicle.
The wildcard exemption lets you to protect up to $3,000 of any type of personal property. The exemption does not apply to wages and is subject to the following limits:
- $1,500 in cash
- $500 total in all bank accounts that are not for consumer debt or educational loans
- $2,000 in bank accounts for consumer debt
- $2,500 in bank accounts for educational loans
Personal Property Exemptions
Your personal property is exempt up to the following amounts:
- Household goods, furniture, and provisions of up to $6,500 with no individual item exceeding $750
- Clothing for personal use
- Up to $3,500 in books and electronic media
- Family pictures and keepsakes
- Up to $3,500 in furs, jewelry, and personal ornaments
- A cell phone, personal computer, and printer
- Prescribed health aids
Tools of the Trade Exemption
Washington lets you exempt up to $10,000 of the tools, instruments, and materials you need to carry out a trade or profession to support yourself.
Pension and Retirement Exemption
Most pension and retirement plans are exempt in Washington, including:
- Most tax-exempt retirement accounts, such as 401(k)s, IRAs, and defined benefit plans
- State and city employee retirement benefits
- Police and firefighter retirement benefits
- Teacher and Judge retirement benefits
Public Benefit Exemptions
The following public benefits are exempt:
- Social Security benefits
- Unemployment benefits
- Workers' compensation benefits
- Public assistance grants and payments
- Crime victims' compensation
Insurance Benefits Exemption
- Most life insurance proceeds
- Disability insurance benefits
- Annuity contract benefits of up to $3,000 per month
- Proceeds from fire insurance policies covering exempt property
- Fraternal benefit society benefits
- The separate property of a spouse not filing for bankruptcy
- Partnership property
- Personal injury awards
- Child support
- Income from a trust fund created for your support
- The property of an incompetent
Need Help Filing for Bankruptcy in Washington?
If you are having trouble paying your bills, hiring an attorney to represent you in bankruptcy might 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 your 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.