When considering filing for bankruptcy in Arkansas, one of the most important concepts that a person must understand is the role of bankruptcy exemptions. Depending on the type of bankruptcy, exemptions can protect a debtor’s property from being sold or reduce the amount that the debtor must pay to his or her creditors.
The rules for bankruptcy exemptions are complex and can be confusing, but in the right hands, exemptions are a powerful tool for debtors. If you are considering bankruptcy in Arkansas or Oklahoma, you owe it to yourself to contact the expert bankruptcy attorneys of Nolan Caddell Reynolds to ensure you get the most of the available bankruptcy exemptions.
In the meantime, here is some basic background about bankruptcy exemptions in Arkansas.
How Do Bankruptcy Exemptions Work?
How bankruptcy exemptions work differs depending on whether a debtor files for Chapter 7 or Chapter 13 bankruptcy. (These chapter numbers refer to the separate chapters of the U.S. Bankruptcy Code that describe these two types of bankruptcies.)
Exemptions in Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is known as a “liquidation,” because the bankruptcy trustee is supposed to sell a debtor’s non-exempt property to pay off his or her debts. Exemptions in a Chapter 7 bankruptcy protect property from being sold like this.
Exemptions in Chapter 13 Bankruptcy
Exemptions work a little differently in a Chapter 13 bankruptcy, because Chapter 13 does not involve liquidating assets. Under Chapter 13, the debtor develops a repayment plan that lasts from three to five years. The total amount that the debtor repays under the repayment plan depends, in part, on the value of property that he or she owns. Exempt property is not taken into account in making that determination.
State vs. Federal Bankruptcy Exemptions
As we’ve mentioned before, the Bankruptcy Code lets states decide what exemptions are available to their residents. It does this in two ways: First, it allows states to develop their own sets of bankruptcy exemptions. Second, it provides its own list of federal bankruptcy exemptions, but lets states decide whether their residents can use those federal exemptions.
For example, in Arkansas, debtors can choose to use either the Bankruptcy Code’s federal exemptions or Arkansas’ own state exemptions. In contrast, Oklahoma doesn’t permit its residents to use the federal bankruptcy exemptions—they must use Oklahoma’s state exemptions.
However, even in Arkansas and other states that give their residents the freedom to choose state or federal exemptions, that freedom is limited. Debtors in those states can choose to use the state exemptions or the federal exemptions, but not both. And they can’t “mix and match” from the two lists of exemptions: They must choose either all-state or all-federal exemptions.
Which set of exemptions a debtor chooses in his or her case can make a big difference. To illustrate, we’ve listed some of the most common bankruptcy exemptions under state and federal law in Arkansas below:
State Bankruptcy Exemptions in Arkansas
- The Arkansas Homestead Exemption
Arkansas law provides two distinct homestead exemptions. Although a debtor may qualify for both, he or she can only use one, and so must choose between them. The two homestead exemptions are:
- Anyone can exempt real or personal property that he or she or a dependent uses as a residence. For unmarried debtors, the exemption is limited to $800 in value. For married debtors, the exemption is limited to $1,250.
- Debtors who are married or the head of a family can instead exempt a rural or urban homestead, subject to the following limits:
- A rural homestead—one outside of any city, town, or village—of up to 160 acres can be exempted to a value of $2,500. A rural homestead of no more than 80 acres can be exempted regardless of value.
- An urban homestead of up to one acre can be exempted to a value of $2,500. An urban homestead of no more than ¼ acre is exempt regardless of value.
- Arkansas Personal Property Exemptions
Personal property refers to any property other than real estate—such as clothing, a car, or furniture. Arkansans can exempt all of their clothing, plus, of their other personal property:
- Up to $200 if the debtor is unmarried and not the head of a family; or
- Up to $500 if the debtor is married or the head of a family.
Although Arkansas statutes prescribe additional exemptions for specific types of property—like motor vehicles and wedding bands—the limits above are defined in the Arkansas Constitution, and so override the statutory exemption amounts.
Federal Bankruptcy Exemptions
(Note: The values listed below are updated once every three years. As of today, the most recent update occurred in February 2016. The notice of updated values can be found here.)
- The Federal Homestead Exemption
Federal law exempts real or personal property used as the debtor’s residence (or as a dependent’s residence) up to a value of $23,675.
- Federal Personal Property Exemptions
The Bankruptcy Code also includes several specific exemptions for various types of personal property. These exemptions include:
- Motor vehicle: Up to $3,775 in value.
- Household furnishings, household goods, clothing, appliances, books, animals, crops, or musical instruments held primarily for personal use: Up to $600 per item and $12,625 in aggregate.
- Jewelry: Up to $1,600.
- Wild card: The debtor may also exempt any other property to a value of $1,250. If the debtor uses less than the total homestead exemption, he or she can apply that unused amount to other property, up to $11,850.
Federal Non-Bankruptcy Exemptions
Although a debtor who chooses to use the Arkansas state exemptions cannot also use the federal bankruptcy exemptions, the Bankruptcy Code does define some additional exemptions that apply regardless of whether state or federal exemptions are chosen. Among the most significant of these is the exemption for funds in a tax-exempt retirement account (such as a 401(k) or IRA).
Note, however, that the exemption for funds in an IRA or Roth IRA is limited to $1,283,025.
How a Bankruptcy Lawyer in Arkansas Can Help
Filing for bankruptcy in Arkansas is a complicated process with numerous traps for the unwary. Some of those traps are failing to understand how bankruptcy exemptions work or choosing the wrong set of exemptions for your needs. A qualified bankruptcy lawyer can help you understand what exemptions are available, which best fit your case, and how to best use them.
Nolan Caddell Reynolds is an Arkansas law firm serving clients in Arkansas, Oklahoma, and throughout the country. Our knowledgeable and experienced bankruptcy lawyers help our clients understand and navigate the legal and practical complexities of bankruptcy. If you are considering filing for bankruptcy in Arkansas or Oklahoma, or would simply like more information about how bankruptcy works, contact us today for a free case evaluation.