Bankruptcy exemptions play a significant role in both Chapter 7 and Chapter 13 bankruptcy because exemptions protect your property from creditors. In Chapter 7 bankruptcy, you can keep property covered by a bankruptcy exemption. In Chapter 13 bankruptcy, exemptions help keep your plan payments low. Read on to learn more about bankruptcy exemptions and how they work, including:
Learn more about applying different types of bankruptcy exemptions.
Exemptions allow you to keep a certain amount of assets safe in bankruptcy, such as an inexpensive car, professional tools, clothing, and a retirement account. If you can exempt an asset, you don't have to worry about the bankruptcy trustee appointed to your case taking it and selling it for your creditors' benefit, or paying to keep the asset. (We explain how exemptions work in Chapters 7 and 13 below.)
Many exemptions protect specific property types, such as a motor vehicle or furniture, up to a particular dollar amount. Sometimes an exemption protects the entire value of the asset. Some states have a "wildcard exemption" that can be applied towards any property you own.
Exemptions always protect the same amount of property regardless of the chapter filed. However, what happens to "nonexempt" property you can't protect with a bankruptcy exemption will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy is a liquidation bankruptcy where the appointed trustee sells your nonexempt assets to pay your creditors. Exemptions help you protect your assets in Chapter 7 bankruptcy because the bankruptcy trustee can't sell exempt property.
For example, if your state has a $5,000 motor vehicle exemption and you have one car worth $4,000, the exemption will cover all of the car's equity and you can keep it. For more information about keeping a car in Chapter 7, as well as other property, see Exemptions in Chapter 7 Bankruptcy.
A Chapter 13 bankruptcy allows you to keep all your property while paying some or all of your debt in a three- to five-year Chapter 13 repayment plan. But this benefit comes at a cost. You'll have to pay nonexempt creditors for the property you can't protect with an exemption.
Nonpriority unsecured creditors, such as credit card issuers, must receive at least as much as the value of the property you can't exempt. So in Chapter 13 bankruptcy, being able to exempt all or most of your property helps keep your monthly plan payment low.
Learn more about exemptions in Chapter 13 bankruptcy.
State and Federal Bankruptcy Exemptions
Each state has a set of bankruptcy exemptions, and federal law provides a federal bankruptcy exemption set, too. Some states require you to use the state exemptions while others give you the option to choose the state or the federal bankruptcy exemption set. But you must choose one or the other--you can't mix and match exemptions from two sets.
The state's exemption laws you'll qualify to use will depend on where you lived during the last two years called the "domicile requirements." For more information about the differences between state and federal exemptions and domicile requirements, read Which Exemptions Can You Use In Bankruptcy?
A second set of federal exemptions called "federal nonbankruptcy exemptions" can be used along with your state's exemptions (you can't combine the federal bankruptcy and nonbankruptcy exemptions). For more information, see The Federal Nonbankruptcy Exemptions.
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