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Bankruptcy exemptions are an important part of the bankruptcy system. In Chapter 7 bankruptcy, exemptions determine what property you get to keep, whether it be your home, car, pension, personal belongings, or other property. If property is exempt, you may keep it during and after bankruptcy. If property is nonexempt, the trustee is entitled to sell it to pay your unsecured creditors. In Chapter 13 bankruptcy, exemptions determine how much you will have to pay to nonpriority, unsecured creditors through your Chapter 13 plan.
If you are considering bankruptcy, it’s important to understand how exemptions work and learn what property is exempt in your state. Here’s a primer on exemptions.
(For more detailed articles on exemptions, see our Bankruptcy Exemptions topic area.)
Bankruptcy Exemption Systems
Each state has a set of exemptions that apply in bankruptcy. Most states require you to use those state exemptions. However, seventeen states allow debtors to choose between the state exemption system and another set of exemptions created by Congress, called the federal bankruptcy exemptions. California is unique in that it has two sets of state exemptions that debtors may choose from.
If you have a choice of exemption systems, you must choose one system or the other. You cannot mix and match. If you choose to use your state exemption system, you may also use a short list of additional exemptions prescribed by federal law, called the federal nonbankruptcy exemptions. To find out current federal nonbankruptcy exemption amounts, see Federal Nonbankruptcy Exemptions .
To find out whether your state makes the federal exemptions available to you, and to learn the exemption amounts for key pieces of property in your state, click on your state link below. To find out the current amounts for the federal bankruptcy exemptions, see Federal Bankruptcy Exemptions .
How Bankruptcy Exemptions Work
If you own property worth a certain amount, and that amount is equal to or less than the exemption amount available in your state, you get to keep the property. For example, say you own a car worth $3,000 and your state has a vehicle exemption of up to $5,000. If you file for Chapter 7 bankruptcy, you will get to keep your car. In the same example, if your car is worth $15,000, the bankruptcy trustee will likely sell your car, pay off your car loan with the proceeds, pay you $5,000 for the exemption, and
pay the rest to your unsecured creditors.
Keep in mind that the trustee will incur costs in selling your property. So, if your equity in the property is not significantly more than the exemption, the trustee is unlikely to sell the property. For example, if you own a piano worth $2,500 and your state has an exemption for musical instruments in the amount of $2,250, the trustee is unlikely to sell the piano. This is because the costs of moving and selling the piano would probably be greater than $250 – so the trustee would end up with nothing to pay your unsecured creditors. (To learn more, see Property Abandonment in Chapter 7 .)
(To learn about exemptions and particular types of property, see What Property Is Exempt in Bankruptcy? )
Which State Exemption System Should You Use?
Which state exemption system you may use depends on where you have lived for the past two years. Here are the rules:
- If your domicile (defined as where you make your permanent home) has been in your current state for at least two years, use that state’s exemptions (or the federal exemptions if allowed in your state).
- If you have not been domiciled in the same state for at least two years, the rules get more complicated. To learn the details, see Bankruptcy Exemptions: Which State Exemption System Can You Use?
Special Rules for the Homestead Exemption
The homestead exemption applies to your home or other real property (the exact definition depends on your state). The domicile rules for the homestead exemption are different. If you acquired your home in the state where you currently live within 40 months prior to filing for bankruptcy, your homestead exemption is capped at $155,675. This cap does not apply if you bought your home with the proceeds from selling another home in that state. (To learn more, see Chapter 7 Homestead Exemption in Bankruptcy .)
Applying Bankruptcy Exemptions in Your Situation
To determine what property you will get to keep if you file for Chapter 7 bankruptcy, start by making an inventory of your property and each piece of property’s replacement value. Then compare the value to your state’s exemption, if any, for that type of property. If your state offers a choice between systems, do this for each system to determine which one allows you to keep the property that matters to you.