Bankruptcy exemptions play a big role in both Chapter 7 and Chapter 13 bankruptcy. In Chapter 7 bankruptcy, exemptions help determine how much of your property you get to keep. In Chapter 13 bankruptcy, exemptions help keep your plan payments low. Read on to learn more about bankruptcy exemptions and how they work.
(For a full list of articles about bankruptcy exemptions, check out our Bankruptcy Exemptions area.)
Filing bankruptcy does not mean that you have to give up all of your property. Through exemptions, you can keep a certain amount of your assets safe in bankruptcy. Many exemptions protect specific types of property, such as a motor vehicle or your wedding ring. Sometimes an exemption protects the entire value of the asset. Other times, an exemption protects up to a certain dollar amount of an asset. Some exemptions, called "wildcard exemptions," can be applied towards any property you own. If you can exempt an asset, then you don’t have to worry about it being taken or affecting your bankruptcy.
Exemptions play different roles depending on whether you are filing a Chapter 7 or Chapter 13 bankruptcy.
A Chapter 7 is a liquidation bankruptcy where the appointed trustee is looking to sell off your assets to pay your creditors. However, the bankruptcy trustee cannot sell any property you are able to exempt. This is how bankruptcy exemptions help you to protect your assets in a Chapter 7 bankruptcy. For example, if your state has a $5,000 motor vehicle exemption and you only have one car worth $4,000, then you can keep it. For more information, see Exemptions in Chapter 7 Bankruptcy.
A Chapter 13 bankruptcy allows you to keep all your property and reorganize your debts. However, the amount you must pay certain creditors still depends on how much property you can exempt. The value of any nonexempt assets must be paid to your nonpriority unsecured creditors (such as credit card issuers) in your bankruptcy. So in a Chapter 13, exemptions help keep your plan payments low by reducing the amount you are required to pay creditors. For more information, see Exemptions in Chapter 13 Bankruptcy.
The amount of property you can exempt depends on which state’s exemption laws you are using. Each state has its own bankruptcy exemptions. Federal law also has a set of exemptions. (To learn about those, see The Federal Bankruptcy Exemptions.)
Some states require you to use the state exemptions; others give you the option of choosing either its set of exemptions or the federal system (you cannot mix and match from both sets). Which state’s exemption laws you qualify to use depends on where you live or have lived recently (called the "domicile requirements."). For more information on differences between state and federal exemptions and domicile requirements, see Which Exemptions Can You Use In Bankruptcy?
In addition to state and federal bankruptcy exemptions, there is a set of federal exemptions that exist under nonbankruptcy law. These exemptions function similarly to bankruptcy exemptions in protecting your property in bankruptcy. However, federal nonbankruptcy exemptions are only available to you if you are using your state’s exemptions (you cannot combine the federal bankruptcy and nonbankruptcy exemptions). If you are using state exemptions, then you can use the nonbankruptcy exemptions in addition to those. For more information, see The Federal Nonbankruptcy Exemptions.