Filing for bankruptcy doesn’t mean that you have to give everything you own to your creditors. Exemptions allow you to protect a certain amount of property in bankruptcy. Below, you will find answers to some of the most commonly asked questions about bankruptcy exemptions.
For more information on how to use bankruptcy exemptions, see our Bankruptcy Exemptions topic area.
When you file for bankruptcy relief, almost all of your property becomes part of your bankruptcy estate. In Chapter 7 bankruptcy, the bankruptcy trustee has the power to sell your assets to repay your creditors unless you can exempt them. If an asset is exempt in Chapter 7 bankruptcy, the bankruptcy trustee can’t touch it.
In Chapter 13 bankruptcy, you are allowed to keep all of your property (including nonexempt assets). But you must pay your creditors an amount equal to the value of your nonexempt assets through your repayment plan.
The bottom line: Bankruptcy exemptions help you protect your property in Chapter 7 bankruptcy and save money in a Chapter 13. To learn more, see Bankruptcy Exemptions: An Overview.
Each state (and the federal system) has a unique set of bankruptcy exemptions. Most exemptions are designed to protect particular types of property (such as your car or jewelry). But there are also exemptions (called wildcard exemptions) that can be used to protect any type of asset.
In general, if you can exempt the entire value of an asset, you can keep it. Some exemptions have specific dollar amount limits while others allow you to exempt an entire asset without regard to its value. If you can only exempt a portion of an asset’s value, a Chapter 7 trustee can still sell it but he or she must pay you the amount of your exemption from the proceeds.
As their name suggests, these are bankruptcy exemptions that are found in federal bankruptcy laws. But because Congress allows states to opt out of the federal exemptions, whether you can use the federal bankruptcy exemptions depends on the laws of your state. Currently, only a minority of states allow debtors to take advantage of federal bankruptcy exemptions.
To learn more about the federal bankruptcy exemptions and which states allow debtors to use them, see The Federal Bankruptcy Exemptions.
Federal nonbankruptcy exemptions are additional exemptions available to debtors that are found outside the Bankruptcy Code. But you can only claim the federal nonbankruptcy exemptions if you are using a state exemption system (you are not allowed to use both federal bankruptcy and nonbankruptcy exemptions). Also, keep in mind that these exemptions are typically more specialized and many of them are only available to debtors who are part of certain occupational groups.
For more information, see The Federal Nonbankruptcy Exemptions.
As discussed, whether or not you can use the federal bankruptcy exemptions depends on the exemption laws of your state. But even if your state gives you a choice, you must use either the federal bankruptcy exemptions or state exemptions (you can’t mix and match). In addition, which state’s exemption system you can use depends on how long you have been domiciled (made it your permanent residence) in your current state.
For more detailed information on these rules, see Which Exemptions Can You Use in Bankruptcy?
The equity in your home is considered an asset in bankruptcy. In most cases, if you want to protect your home in bankruptcy, you will need to use the homestead exemption to exempt your equity.
To learn more about how the homestead exemption works and the homestead exemptions of each state, see our topic area on The Homestead Exemption in Bankruptcy.
Most states have a motor vehicle exemption that is specifically designed to protect a certain amount of equity in your car or other vehicle. But exemption amounts differ greatly from state to state. If your motor vehicle exemption is not enough to protect the entire value of your car, you may also be able to use a wildcard exemption to cover the rest (discussed below).
For more information on how to use the motor vehicle exemption and your state’s exemption amount, see our topic area on The Motor Vehicle Exemption in Bankruptcy.
A wildcard exemption is a type of exemption that can be used to protect almost any type of property. This makes the wildcard exemption especially useful if there is no other exemption designed to protect an asset you own. In addition, if your other exemptions don’t allow you to protect the entire value of an asset, you may be able to apply the wildcard exemption to that property to cover the nonexempt portion.
To learn more, see The Wildcard Exemption in Bankruptcy.