What Assets Can I Protect if I Declare Personal Bankruptcy?

John L. Smith, the 2012 football coach of the Arkansas Razorbacks, has recently filed for bankruptcy — but he will not likely end up a poor man. He will owe a debt of thanks to the way bankruptcy laws are structured.

There are two main types of personal bankruptcies in Arkansas: Chapter 7 and Chapter 13. In a Chapter 13 bankruptcy, a payment plan is arranged between the debtor and his creditors by which the debt is repaid over time. Chapter 7 bankruptcy, on the other hand, wipes out all unsecured debts in exchange for the debtor giving up all of his non-exempt property. Many people are under the impression that everything they own can be confiscated if they declare bankruptcy, but that is not true. Certain items are exempt from bankruptcy proceedings and cannot be seized by your creditors. Arkansas law allows you to choose a list of exemptions from either state or federal law, but not both.

Some of the major exemptions include:

  • Homestead Exemption — The Arkansas exemption is more protective than the exemption offered under federal law. The Arkansas exemption protects property used as a residence from creditors — up to 1/4 acre in a city, town or village, or 80 acres elsewhere, no matter what its value. This means that you cannot be evicted from your family home just because you can’t pay your debts unless your home is collateral for a debt.
  • Insurance Exemptions — Life insurance and disability benefits are protected from creditors under both the federal and state exemptions.
  • Pensions and Retirement Savings Exemptions — The federal law is more protective of pensions and retirement savings than Arkansas law.
  • Personal Property Exemptions — Certain personal property, like jewelry and clothing, is protected under this exemption. Federal law is generally more protective.
  • Wages — Arkansas exempts earned but unpaid wages due for 60 days while the federal law exempts no wages from bankruptcy. (However, it’s important to note that, subject to some restrictions, income earned after the bankruptcy filing is not part of the bankruptcy and does not need to be paid to creditors.)