What Is a Bankruptcy Exemption?

Learn about the law that allows you to keep property in a bankruptcy case.

Bankruptcy provides people burdened by overwhelming debt with a fresh start. The intent is to help people get back on their feet—not to strip them of all of their property. Therefore, those who file don’t lose everything that they own.

A debtor (bankruptcy filer) can protect the things needed to maintain employment and a home. In fact, it’s common that many who file for bankruptcy can keep most, if not all, of what they own.

Finding Out What You Can Keep

Each state determines the assets that its residents can retain in a bankruptcy case. The state lists the legal authority that allows you to keep property in “exemption statutes.”

Most exemption schemes let the debtor protect the following:

  • household furnishings
  • clothing
  • an amount of equity in a vehicle,
  • wedding rings
  • some equity in a residential home, and
  • an ERISA-qualified retirement account.

Some states permit residents to choose between two exemption schemes: the federal bankruptcy exemption list and the state’s exemption list. If you have this choice, you’ll have to decide which set of exemption statutes is best for you—you can’t pick and choose between the two lists. If you select the state list, you’ll be able to supplement your exemptions with the federal nonbankruptcy exemptions, as well.

(To learn more about the property you can protect, see Bankruptcy Exemptions by State.)

How Exemptions Work in Different Bankruptcy Chapters

A debtor can keep all exempt property in a Chapter 7 bankruptcy. By contrast, “nonexempt” property isn’t covered by an exemption. The trustee—the official selected to oversee the case—will sell nonexempt property and distribute the funds to the creditors.

In a Chapter 13 matter, the debtor can keep exempt and nonexempt property. However, creditors must be paid an amount equal to the value of the nonexempt property in the three- to five-year repayment plan (in addition to other required amounts).

How to Claim Your Exemptions

In the bankruptcy schedules that you fill out and file with the court clerk, you’ll include a description of all of the property that you own. You’ll also identify the exemption law that gives you the right to protect it.

It’s essential to claim your exemptions correctly; otherwise, you risk losing valuable property. If you aren’t comfortable reading and applying the law to the facts of your case, you should consult with a knowledgeable bankruptcy attorney.

(For more information about filling out bankruptcy paperwork, see Completing the Bankruptcy Forms.)

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