Exemptions play an important role in both Chapter 7 and Chapter 13 bankruptcy. Depending on the type of bankruptcy you file, they can determine the amount of property you get to keep or how much you must pay unsecured creditors through your bankruptcy. In addition to state exemption systems, there are also federal bankruptcy and nonbankruptcy exemptions. But federal and state laws limit which exemptions you are allowed to use in bankruptcy. Read on to learn more about how exemptions work, the difference between federal bankruptcy and nonbankruptcy exemptions, and when you can use them.
(For comprehensive information, visit our Bankruptcy Exemptions area.)
What Are Exemptions?
When you file for bankruptcy, you don’t automatically lose everything you own. Exemptions allow you to protect a certain amount of property in bankruptcy. Most exemptions are specific to certain types of property (such as your house or car) while others can be used to exempt any type of asset (called wildcard exemptions).
However, keep in mind that exemption laws and amounts vary significantly from state to state. As a result, it is important to check your state’s exemptions or consult with a knowledgeable bankruptcy attorney in your area prior to filing for bankruptcy. (Visit out Bankruptcy Information for the 50 States area to find the exemptions in your state.)
How Do Exemptions Work?
In Chapter 7 bankruptcy, the trustee has the power to sell all nonexempt assets to pay your creditors. Exemptions protect your property from the trustee. If you can exempt the entire value of an asset, you can keep it. If you can’t fully exempt an asset and the trustee sells it, he or she must pay you the amount you were able to exempt. (Learn all about Chapter 7 bankruptcy.)
In Chapter 13 bankruptcy, you get to keep all of your property even if it is not exempt. But in your Chapter 13 repayment plan, you must pay your unsecured creditors an amount equal to the nonexempt value of your assets. In general, the more property you can exempt, the less you will have to pay unsecured creditors in your bankruptcy. (Learn all about Chapter 13 bankruptcy.)
The Federal Bankruptcy Exemptions
As their name suggests, federal bankruptcy exemptions are exemptions found in federal bankruptcy laws. The federal bankruptcy exemptions are the same regardless of which state you live in. However, whether you can take advantage of the federal bankruptcy exemptions depends on state law (discussed below).
The following are some of the most common federal bankruptcy exemptions (if you are married and filing a joint bankruptcy, you can double the exemption amounts below):
- homestead up to $22,975
- motor vehicle up to $3,675
- jewelry up to $1,550
- household goods, furnishings and appliances, clothes, books, animals, crops, or musical instruments up to $12,250 in aggregate value ($575 per individual item), and
- any property up to $1,150 plus $10,825 of the unused portion of your homestead exemption.
To learn more, see The Federal Bankruptcy Exemptions.
When Can You Use the Federal Bankruptcy Exemptions?
States have the power to opt out of the federal bankruptcy exemption system and require debtors to use state exemptions. This means that you can only use the federal bankruptcy exemptions if your state allows it. Further, even if your state offers you a choice between federal and state exemptions, you must use one system or the other (you cannot mix and match).
Currently, the following states allow debtors to use the federal bankruptcy exemptions: Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.
The Federal Nonbankruptcy Exemptions
In addition to the federal bankruptcy exemptions, there are other exemptions available to debtors under federal law. These exemptions are called federal nonbankruptcy exemptions because they are found outside of the bankruptcy code.
In general, federal nonbankruptcy exemptions are more specialized and do not apply to most debtors. Further, you can only use the federal nonbankruptcy exemptions if you are using a state exemption system (they are allowed in addition to your state exemptions). This means that you are not allowed to use them in conjunction with the federal bankruptcy exemptions.
Examples of federal nonbankruptcy exemptions include:
- military group life insurance
- savings account deposits by military while on permanent duty outside the U.S.
- railroad worker unemployment benefits, and
- longshoreman, harbor worker, or government employee death and disability benefits.
For more information, see The Federal Nonbankruptcy Exemptions.