Bankruptcy exemptions play a significant 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.
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.
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 exemptions, called "wildcard exemptions," can be applied towards any property you own.
Exemptions play different roles depending on whether you are filing a Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy is a liquidation bankruptcy where the appointed trustee sells off 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 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 (which can mean paying less on some of them). However, the amount you must pay particular creditors still depends on how much property you can exempt. Nonpriority unsecured creditors (such as credit card issuers) must receive an amount equal to your nonexempt assets. So in Chapter 13 bankruptcy, exemptions help keep your plan payments low by reducing the amount you must pay creditors. For more information, see Exemptions in Chapter 13 Bankruptcy.
State and Federal Bankruptcy Exemptions
Each state has a set of bankruptcy exemptions. Federal law provides an exemption set, too. (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 the two).
Which 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?
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.