Bankruptcy Exemption Laws: Who Qualifies and What Types of Assets Are Exempt?

If you’re concerned that you might lose property through bankruptcy, this is understandable. In some instances, the bankruptcy trustee can take your property to satisfy your debts. However, you can keep some or all of your property by using what are called “exemptions.” Understanding how exemptions work can help eliminate surprises and provide the knowledge you need to get the best possible results. 

What Are Bankruptcy Exemption Laws?

People who file for personal bankruptcy under either Chapter 7 or Chapter 13 may be able to exempt certain assets from the legal proceedings. There are laws allowing bankruptcy filers to exclude specific assets or asset classes up to a certain amount so that those assets won’t be taken and sold to satisfy creditors. 

Most exemptions are specific to a type of asset. For example, the homestead exemption applies to your primary residence, and the motor vehicle exemption to your car. However, there is also a wildcard exemption, which consists of any property up to a certain amount that you can protect from bankruptcy. 

The Differences Between Federal and State Bankruptcy Exemptions

Federal law provides a list of bankruptcy exemptions, as do many states. In some states, you can choose whether you will apply the federal or state exemptions. However, 31 states have opted out of allowing their residents to use the federal bankruptcy exemptions, meaning you must use the state exemptions. 

It’s also important to consider the residency requirement when filing for bankruptcy. Specifically, you may use the exemption system of the state where you have lived for the past two years before filing. If you haven’t lived in the same state for the past two years, you can use the exemption system where you lived for the majority of the time for the 180 days prior to those two years. If you are not eligible to use any state exemption system, you may use the federal system. 

How to Apply Exemptions in Chapter 7 and Chapter 13 Bankruptcy

Some assets are completely exempt during personal bankruptcy, no matter how much they’re worth. A few examples are certain retirement accounts, Social Security, and other public benefits. Otherwise, you’ll need to refer to exemption laws and limits for each type of asset. 

The Homestead Exemption

Many people who file for bankruptcy are understandably worried about losing their homes. The homestead exemption protects the equity in your home up to a certain limit. Equity is defined as the difference between a property’s value and what you owe on your mortgage. 

If your home is worth more than your mortgage balance, you have equity. Your home will be protected as long as the amount of your state or federal exemption covers your equity. For example, if your home is worth $200,000 and you have a home mortgage with a $150,000 balance, your equity is $50,000. As long as your available homestead exemption is $50,000, the bankruptcy trustee can’t touch your home. 

Personal Property Exemption

Some states list “personal property” as exemptions, but most list specific types of property, such as vehicles, jewelry, clothing, and household goods. You can use this exemption for these items as well as other things you wish to keep, such as musical instruments, farm equipment, artwork, books, tools, and other valuables. The amount of this exemption will vary by state.

Wildcard Exemption

Some states also allow bankruptcy filers to declare a certain dollar amount of any asset as an exemption. This is often called a wildcard exemption, but the amount isn’t that great. 

Applying Bankruptcy Exemptions

How you apply bankruptcy exemptions will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy. When you file for Chapter 7 bankruptcy, your non-exempt assets will be liquidated by the trustee to pay your creditors. If you have exemptions you can use, those are listed in your bankruptcy paperwork. Then, you simply get to keep those assets. 

However, if the exemption is worth less than the value of an asset, such as a luxury vehicle, the bankruptcy trustee can sell the asset and reimburse you the amount of the exemption so you would have funds to purchase another vehicle for transportation. 

Under Chapter 13 bankruptcy, you are reorganizing your finances and creating a debt repayment plan. Your assets are not liquidated. However, you can use bankruptcy exemptions to reduce your monthly payments under your bankruptcy repayment plan. 

Bankruptcy exemptions can be complex. It’s easy to miss exemptions and leave money on the table or apply the wrong and have your case dismissed. It’s always a good idea to seek the guidance of an experienced bankruptcy attorney. 

Gulf Coast Bankruptcy works hard to provide residents throughout the Gulf Coast region with accurate and up-to-date information regarding bankruptcy and debt relief. Our goal is to provide you with the information you need to make the most informed decisions possible about bankruptcy and your financial future.