Filing for bankruptcy is a big step, and it’s something that intimidates many people. There’s a common misconception that going through the bankruptcy process will leave you penniless because it will require you to surrender all of your material possessions to satisfy creditors. Depending on the type of bankruptcy you file and where you live, you can protect many of your assets by taking advantage of different bankruptcy exemptions. 

What Are Bankruptcy Exemptions?

When people file for bankruptcy, they still need to be able to function in society, meaning they have a place to live and a means to get to and from work. Bankruptcy exemptions are federal and state laws that allow people to protect certain essential property during the bankruptcy process. In other words, property that is “exempt” can’t be seized by the bankruptcy trustee to satisfy creditors. 

The kind of property and amount of property you can claim as exempt varies from state to state. Some states are incredibly generous with exemptions, while others are not. Federal law also provides a list of exemptions, but most states will require that you use state-specific exemptions. 

Assets Exempt Through Chapter 7 Bankruptcy

Also referred to as liquidation bankruptcy, Chapter 7 bankruptcy forgives most, if not all, of your unsecured debt after the bankruptcy trustee liquidates your assets to repay creditors. While this sounds scary, there are exceptions to what becomes part of the bankruptcy estate. For example, the trustee can sell your non-exempt property to satisfy creditors, but they can’t touch your exempt property.

The federal system and most state bankruptcy systems will allow you to keep a portion of the equity in your primary home, vehicle, and personal property. Some states even offer an unlimited homestead exemption, which allows you to keep a home no matter what it’s worth. Usually, clothing and household goods are exempt unless they are worth a significant amount of money. 

Assets Exempt Through Chapter 13 Bankruptcy

If you own many assets that you don’t want to risk losing through the bankruptcy process, Chapter 13 might be a better option. This type of bankruptcy allows you to keep all of your assets. Chapter 13 requires that you participate in a three—to five-year debt repayment plan. If you successfully complete the terms of your plan, any leftover debt will be forgiven at the end. 

The exemptions available for Chapter 13 are the same as those for Chapter 7, but they are used differently. Specifically, you wouldn’t need the exemptions to prevent you from losing property. However, they would play a role in determining how much your monthly payment would be under the debt reorganization plan. 

Assets That Are and Aren’t Exempt from Bankruptcy

You’ll want to get a good idea of what assets are exempt and which ones may be in jeopardy before you file personal bankruptcy. This can help guide your choice between Chapter 7 and Chapter 13 bankruptcy. 

Exempt Assets in Bankruptcy

These are items you can generally keep:

• Your primary home
• Your car, up to a specific value
• Reasonably necessary clothing
• Reasonably necessary household items
• Jewelry up to a specific value
• Child support and alimony
• Retirement accounts
• Life insurance policies
• Pensions
• Tools required for a trade
• Public benefits
• Personal injury awards

Non-Exempt Assets in Bankruptcy

These are items you will often have to give up:

• A vacation or second home
• A second vehicle
• Recreational vehicles
• Luxury clothing
• Stamps, coins, or other valuable collectibles
• Stocks, bonds, cash, or other investments
• Expensive instruments
• Family heirlooms

Types of Bankruptcy Exemptions

Some states require that you use their exemptions, while others allow you to choose between state and federal exemptions. Here are a few examples of exemption types, depending on where you live:

• Homestead Exemption — This exemption helps protect your home during Chapter 7 bankruptcy and can reduce your payments through Chapter 13 bankruptcy.
• Motor Vehicle Exemption — This exemption allows you to keep your primary vehicle or some of its equity, which is the difference between the amount you owe and its fair market value.
• Wildcard Exemption — Some states allow a wildcard exemption, which can be applied to personal assets. The amount varies. 

Protect Your Assets During Bankruptcy

If you decide that bankruptcy is right for your situation, you want to make the most of your federal and state exemptions. The best way to accomplish this is to work with a knowledgeable financial or legal professional who can guide your choices and explain your options. Gulf Coast Bankruptcy is dedicated to helping those seeking assistance with financial struggles get the information they need to make informed decisions about their financial future.