What Are Bankruptcy Exemptions?
by Philip Ahn, Attorney
Are you thinking about filing bankruptcy but worried about losing your property? Fortunately, there are federal bankruptcy laws on the books designed to help protect property when filing.
Bankruptcy exemptions are in the form of federal and state laws that protect specific types of property. This exempted property can’t be sold to pay off unsecured debt. However, these exemptions are not automatic. You must select the appropriate exemptions when filing your bankruptcy case. If you do not, your property may not be protected.
Understanding bankruptcy exemptions and applying them correctly to your case can be difficult when you have significant assets, are married, or have other unique asset features. We can connect you with a local bankruptcy lawyer before moving forward on your own.
Learn more about federal and state bankruptcy petitions below.
What Does “Exempt” Mean in Bankruptcy?
Exempt property is protected from creditors through bankruptcy. This means that it can’t be liquidated (sold). Each state allows exemptions, which debtors can select (in many states) instead of federal exemptions.
The purpose of exemptions is to protect certain basic assets when you emerge from bankruptcy. You can still have a home, transportation for work, and the ability to otherwise reasonably take care of yourself post-discharge.
Exempted Property – Can I Keep My House and Car in Chapter 7?
Most people who file Chapter 7 get to keep their home and car. However, there are certain limits to what you can protect. Exemptions differ among states. To capture an exemption, a debtor must file a Schedule with the bankruptcy court. Examples of exempted property include:
- Car – up to a particular value
- Personal home – so long as your equity does not surpass state or federal limits
- Cash – up to a certain amount
- Spousal support and child support
- Reasonably necessary household goods, clothing, appliances, etc.
- Jewelry – up to a specific value
- Pension plans and retirement funds
- Government assistance like social security, unemployment, and welfare
- Damages awarded due to a personal injury case – up to a specific value
Non-Exempt Property – Are There any Limits to Exemptions?
If you are filing Chapter 7, certain types of property will not be protected by the Bankruptcy Codes. Items that are typically forfeit in Chapter 7 bankruptcy include:
- A second car, truck, or home
- Cash, bank accounts, and other financial assets
- Valuable family heirlooms like furniture, jewelry, etc.
- Valuable collections like artwork, coins, and stamps
Who Can Claim Bankruptcy Exemptions?
While people and businesses can both file Chapter 7, exemptions are only offered to individuals. If a company files Chapter 7, the business shuts down, and its property is sold or returned to creditors. Since an individual or a married couple can’t simply “get shut down,” bankruptcy exemptions are available to protect them and certain of their property.
What Are the Differences Between Federal and State Exemptions?
Federal bankruptcy exemptions are baked into the Bankruptcy Code. Currently, only 20 states allow filers to use federal exemptions. In the other 30 states, you must use exemptions allowed by the state’s laws. If you live in a state that hasn’t opted out of the federal exemptions program, then you have a choice between those exemptions you want to use.
Federal exemptions are updated every three years. If you live in a state where you have the choice between federal and state exemptions, you should speak with your lawyer to determine which option best fits you and your family.
What Are the Federal Exemptions for Chapter 7?
In some ways, federal exemptions are more advantageous than a state’s, but in other ways, they can be more burdensome. How much they benefit you depends on the type of property you have, how much equity you own, and the state where you live. Examples of current Chapter 7 federal exemptions include:
- Federal Homestead Exemption (Your Home): Equity up to $25,150 is currently exempted for individuals and up to $50,300 for married couples. The total amount fluctuates through adjustments due to inflation.
- Wildcard Exemption: A type of exemption that can be used to protect any kind of property that is not otherwise covered. Currently, the federal wildcard exemption is $1,325 and up to $12,575 of any unused part of the federal homestead exemption.
- Motor Vehicle: Up to $4,000
- Personal Injury Settlement: Up to $15,000, not including damages for pain and suffering
- Household Goods: Up to $625 per individual item, but can’t exceed $13,400 when adding the value of all exempted items (i.e., furnishing, clothes, pets, instruments, etc.)
- Jewelry: Up to $1,700
- Tools of Your Trade: Up to $2,525 (i.e., tools, books, health aids, learning programs, etc.)
- IRAs and Roth IRAs: Up to $1,362,800
What States Allow Federal Bankruptcy Exemptions
It’s important to remember that not all states allow you to choose federal bankruptcy exemptions. Currently, the states that do give you a choice include:
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- Rhode Island
Some states offer more generous exemptions than what is available under the federal Bankruptcy Code. If you live in a state that gives you a choice, you can usually use federal non-bankruptcy exemptions in addition to the ones your state offers.
How Do Exemptions Work for Married Couples?
Married couples have the choice to file jointly, or each person can file separately. The best option depends on the type of debts you have individually and together, your total assets, state/federal laws, and other considerations.
For the most part, filing separately can be beneficial if you live in a community property state, and your state allows you to double exemptions. Federal bankruptcy exemptions do allow couples to double their exemptions. For example, the motor vehicle exemption would be $8,000 instead of $4,000.
How Much Cash Can I Keep in Chapter 7?
The amount of cash you can keep when filing Chapter 7 depends on your exemptions, the state where you reside, and other factors. Most states offer cash and bank account exemptions. However, it is in your best interest to avoid surprises by knowing what type of cash is exempted and what is not. Otherwise, you may lose money that you did not anticipate losing from filing.
Some people decide to use the federal wildcard exemption of $1,325 to protect cash. That number doubles to $2,650 for married couples. Most states will offer special wildcard exemptions to safeguard additional money as well.
Also, you can keep any money you earn after filing for bankruptcy. So, you can begin saving right away after submitting your paperwork. At filing, it is necessary to report the exact amount of cash in your bank accounts as of the day you file. If you don’t, you could lose that money.
What Debts Can’t be Discharged in Chapter 7?
It’s essential to know the difference between a discharge and an exemption. A discharge occurs when you meet all of your bankruptcy requirements and your assets have been liquidated. Exemptions help to save certain property when filing bankruptcy. In general, the following types of debt won’t be discharged when filing Chapter 7.
- Secured debts like mortgages and student loans
- Child support, spousal support, and alimony
- Money borrowed on a credit card to pay back taxes
- Additional types of debt if the creditor’s objection to a discharge is approved
Does Everyone Lose Property in Chapter 7?
Not at all. Most people keep their property in Chapter 7. Nonetheless, there are limits to what you can keep via federal or state exemptions. If you have a regular income, there are assets that you wish to keep that aren’t protected under bankruptcy laws. If you can t make monthly payments for 3 to 5 years, you may want to consider Chapter 13.
Discuss your options with a bankruptcy lawyer before choosing which Chapter you file as it can have a significant effect on the property you keep.
Do Exemptions Exist for Chapter 13?
Exemptions do exist for Chapter 13. Federal and state bankruptcy laws typically allow the same type of exemptions for Chapter 7 and Chapter 13. One difference is that debtors must make monthly payments to keep any non-exempt property.
For example, if you have a lot of equity in your home, and don’t want it sold, you must pay creditors the value of the home’s non-exempt equity. It’s important to note, adding a non-exempt property to a Chapter 13 repayment plan will likely increase your monthly payments.
We Offer Affordable Bankruptcy Plans – Contact Us Today
Filing bankruptcy without a lawyer can be confusing, frustrating, and riddled with complexities. A seasoned bankruptcy attorney can help you choose the best Chapter to file, interpret state and federal exemptions effectively, and advise you post-bankruptcy.
Most lawyers won’t start working on your case until they have been paid in full, which can present problems for individuals who need immediate debt relief.
Our lawyers offer affordable payment plans that allow them to get started on your case right away. Additionally, they provide virtual consultations so that you can begin the process from the comfort and safety of your home.
Ready to start your bankruptcy process? Get instantly connected with an unbundled bankruptcy lawyer, and begin your journey to a fresh financial start today.