Updated May 20, 2016
In most states, you can protect certain business assets, commonly known as "tools of the trade," when you file for bankruptcy. Both the federal bankruptcy law and most state laws provide specific exemptions for items that qualify as tools of the trade.
In Chapter 7 bankruptcy you get to wipe out most debts, but must give up certain property so that the trustee can sell it and use the proceeds to repay your unsecured creditors. You don’t have to give up all of your property, however. Bankruptcy law protects certain items of property – these laws are called exemptions. If the equity in an item of property is exempt, the trustee cannot take it.
In Chapter 13 bankruptcy, exemptions play a role in how much you must repay to unsecured creditors.
(To learn more about exemptions and how they work, see our Bankruptcy Exemptions area.)
To qualify as a "tool of the trade," the property claimed as exempt must be used for the purpose of making a living. The property must be owned by an individual--not by an incorporated business, LLC or partnership-- and must be used directly for employment or business purposes.
For example, lawn mowing equipment would qualify as a tool of the trade where the owner has a lawn care business. A lawn mower owned by a homeowner who works as a ski instructor and only uses it to mow his own lawn, would not qualify for this exemption.
Depending on the business you are in, some items which may qualify as tools of the trade include:
The answer to this is yes, but the details may differ depending on the state or district you are in.
Exclusive use or specially equipped. Some states may require that the vehicle be used exclusively for business and not be used for commuting or personal transportation. Others may require that the vehicle be specifically altered for business use (for example, a truck with tanks or lift equipment permanently affixed).
Travel required in your business. In some states, vehicles qualify if the particular trade requires travel, such as real estate sales. Boats may also qualify if you are a fisherman or have another type of business which requires use of a boat.
Some states give you a choice between federal and state exemptions while others require you to use the state exemptions only. The amount available to you as a tool of the trade exemption will depend on the state you are in.
Under the federal law, the exemption available for tools of the trade is limited to $2,375. However, the federal exemption is not be available in all states. (To find out if you can use the federal exemptions in your state, see our Federal Bankruptcy Exemptions article.)
While most states provide some form of specific exemption for tools of the trade, the amount available varies and some provide no exemption for this category. For example, Delaware provides a $15,000 exemption for tools of the trade, Kansas provides a $7,500 exemption, and Illinois provides only a $1,500 exemption. Florida does not provide a tools of the trade exemption at all.
(To find the tools of the trade exemption in your state, visit out Bankruptcy Exemptions in Each State topic.)
Several states provide additional exemption amounts for items used in specific trades or industries. Often these are in addition to general tools of the trade exemptions. You need to review the law in your state to find the exemptions available to you. Some examples of items which may be exempt under trade specific exemptions include
To learn how to find statutes in your state, visit Nolo's Legal Research Center.