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 What Is a Bankruptcy Exemption?

An exemption in bankruptcy allows a debtor to keep certain property or assets even after bankruptcy is filed. Exemptions are defined by statute, and exempt property cannot be seized or sold to satisfy a bankruptcy petitioner’s debts.

In both Chapter 7 and Chapter 13 bankruptcy, exemptions play a vital role.

  • Chapter 7: Chapter 7 bankruptcy exemptions help determine which property you get to keep after the bankruptcy discharge has been granted. After filing for bankruptcy, bankruptcy exemptions help you protect your property.
  • Chapter 13: Chapter 13 bankruptcy exemptions help determine how much you will have to pay to your unsecured creditors, which can mean the difference between getting your plan confirmed and getting knocked out of Chapter 13.

Exemptions In Federal Bankruptcy Law

A debtor who files bankruptcy under federal law must follow 11 USC 522 when claiming exemptions. Following is a short description of some of the major exemptions available to a person filing bankruptcy under federal law. A lawyer should determine the particulars of each exemption and the available exemptions.

Note that every few years, the federal exemptions are adjusted for inflation.

In Bankruptcy, What Happens to Property That Is Not Protected By an Exemption?

It depends on the bankruptcy chapter whether nonexempt property assets are exempt or not.

You will keep all “exempt” property covered by a bankruptcy exemption and lose any nonexempt assets if you file for Chapter 7 bankruptcy. The Chapter 13 plan allows you to keep all your property, but you must pay your creditors for nonexempt assets.

Understand how bankruptcy exemptions work in Chapter 7 and Chapter 13.

Bankruptcy Exemptions for Property

Here are some of the most commonly used federal exemptions. The exemption amounts can be doubled if you are a married couple filing jointly. The amounts apply to cases filed between April 1, 2022, and April 1, 2025.

The Federal Bankruptcy Homestead Exemption Protects Your Home

The federal exemptions allow you to protect $27,900 of equity in your principal residence. (11 USC § 522(d)(1).) You must live in the home to use the homestead exemption.

Residential properties include:

  • A house or another dwelling, such as a condominium
  • Residential property (such as a trailer).

The homestead exemption does not protect the equity in investment or rental properties.

These Federal Bankruptcy Exemptions Protect Your Belongings

In addition to real estate, there are some commonly used federal “personal property” exemptions:

  • $4,450 for your motor vehicle. (11 USC § 522(d)(2).)
  • $1,875 for jewelry. (§ 522(d)(4).)
  • $700 per individual item with a $14,875 aggregate value on household goods, furnishings, appliances, clothes, books, animals, crops, and musical instruments. (11 USC § 522(d)(3).)
  • $2,800 for tools of the trade, including implements and books
  • Health aids. (11 USC § 522(d)(6).)
  • $14,875 in loan value, accrued dividends, or a life insurance policy interest. (11 USC § 522(d)(8).)

Are the Federal Bankruptcy Exemptions Used in Every Court?

No. Some states only use federal bankruptcy exemptions. Other states refuse to use the federal bankruptcy exemptions instead of their own state exemptions. Thirdly, some states allow debtors to choose between federal and state exemptions.

It is the only part of the Bankruptcy Code that allows states to control what happens during bankruptcy, which makes bankruptcy exemptions unique. Congress writes all other bankruptcy laws.

How Does the Wildcard Exemption Work?

The debtor can use the wildcard exemption to save any property, including property not covered by the other exemptions. A debtor can only save up to $1,150 plus the unused value of the homestead exemption. However, the homestead exemption cannot exceed $10,825 in unused value.

Let’s say a debtor wants to save his second car from bankruptcy. There is a $5,000 value on the car. If the debtor only uses $17,000 to save his house, they would have $4,625 left to save their second car. The remaining homestead exemption is not enough to save the $5,000 car. A debtor could save the car and still have $775 left over to save other property, such as their gun collection, if we add $4,625 to the $1,150 provided by the federal exemptions.

Even if the debtor uses all $21,625 to save their home, they still get to use the $1,150 they were given. Accordingly, debtors are entitled to protect up to $1,150 of property not already protected by other exemptions under the federal bankruptcy exemption system.

Who Can File a Bankruptcy Exemption?

A bankruptcy exemption can be filed by anyone who files for bankruptcy. Exemptions are available for both Chapter 7 and Chapter 13 bankruptcy filings, but the exemptions vary from state to state.

Make an inventory of your property and list its replacement value to determine what you will keep if you file for Chapter 7 bankruptcy. You can then compare the value to your state’s exemption for that type of property. Determine which system allows you to keep the property you value the most if your state offers a choice.

Do All States Have the Same Exemptions?

No. During a bankruptcy case, each state has the discretion to determine which assets a debtor may keep. A state can allow a debtor to choose between federally-created exemptions, as defined in 11 USC 522, or state-created exemptions or a state may limit a debtor to only the state-created exemptions.

A debtor can use the exemptions from only one statute, federal or state, but not both. In states with more than one exemption statute or system, the debtor can only use one exemption.

Which Exemption System Can I Use?

Your state’s laws will determine the answer to this question. Federal law exemptions are not available to residents of most states. If you live in a state that prohibits federal law exemptions, you must use your own state’s exemption system. Some states, however, allow residents to choose between the state and federal exemption systems.

What Is a Bankruptcy Exemption Limit?

Equity in property is subject to an exemption limit and is limited in amount. A property’s equity is the difference between its fair market value and the unpaid balance. The equity value of a home valued at $500,000 with a loan of $450,000 is $50,000. The debtor will not have to liquidate the equity in their home if the state’s homestead exemption is $50,000 or greater.

Your limit may be affected by other factors depending on where you live. In some states, couples can double their exemption limits if they marry. There may also be an increase in exemption amounts if you file as a head of household or if you have many dependents. The exemption limit for a homestead, personal property, or other items may be higher for senior citizens in some states.

You may also be able to raise your exemption limit if you have a disability, especially if you drive a motor vehicle.

What Are Some Other Common Exemptions under State Law?

Below is a list of some other common exemptions available in various states. State exemptions vary widely, so it is important to research whether the exemptions below apply in your state.

Some states limit personal property exemptions, such as $1,000 for tools of the trade or one animal. Personal property exemptions are almost nonexistent in some states, such as Alabama and New Jersey.

Do I Need a Bankruptcy Lawyer?

If an exemption is filed incorrectly, the property may be seized, even if it would have been exempt had it been filed correctly.

A bankruptcy lawyer knows the ins and outs of filing for bankruptcy and can recommend what chapter of bankruptcy is right for you, ensuring that your exemptions are filed correctly.

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