Declaring bankruptcy does not mean that you will lose everything. People are able to keep a certain amount of assets through bankruptcy exemptions. What and how much you are able to keep depends on a few factors including your state exemption laws and the type of bankruptcy you have filed for. By taking the time to thoughtfully plan and learn about how exemption laws protect assets in bankruptcy, you can know what to expect!

Understanding Bankruptcy Exemptions

Bankruptcy exemptions determine how many assets you are able to keep. An exempt asset prevents that asset from being seized and used to pay debts to creditors. Exemption types vary and can provide protection for specific property (like cars and furniture) up to a particular dollar amount or it can cover the complete value of the asset. There are also other exemptions that can be applied to any type of property an individual owns. Specifics of bankruptcy exemptions depends on: 

  • state bankruptcy laws which determines which property can be exempt 
  • type of bankruptcy: chapter 7 or chapter 13

The goal of bankruptcy is not to take everything one owns but rather to provide a fresh financial start. So you will find that a significant amount, not all, of assets can be kept. 

How Do Bankruptcy Exemptions Work?

Bankruptcy exemptions significantly impact your assets in both Chapter 7 and Chapter 13 filings. It is critical to know that bankruptcy exemptions play a different role in both types: 

  • Chapter 7: declaring this type of bankruptcy eliminates most forms of debt but also takes assets to pay debt owed to creditors. Exemptions help you keep your assets so that only nonexempt assets can be used towards paying debt. The amount of property that you are able to exempt in a Chapter 7 depends on the state you live in. 
  • Chapter 13: This type of bankruptcy allows people to keep their assets and involves restructuring debt with creditors by making a payment plan that repays a portion of the debt owed. The amount that has to be repaid to creditors depends on how much property you can exempt – in most cases, creditors have to receive an amount equal to nonexempt assets. So exemptions in a Chapter 13 help keep payment plans low by reducing the amount that must be paid to creditors. 

To understand how this works and the difference between both chapters, a useful example to think through is a vehicle exemption. Let’s say that your state has a vehicle exemption for up to $7000 and your car is worth $5000. Here is how it would be treated in each chapter: 

  • Chapter 7: you would get to keep your car because the exemption amount is greater than what your car is worth. If your car was valued at $10,000, the bankruptcy trustee would sell your car and provide you with $7000 which is the exemption amount. The rest would be given to your creditors to pay off debt. 
  • Chapter 13: you would not be required to pay more to your creditors because the value of your car is less than the exemption. But if the value of your car exceeded the exemption amount, you would be required to pay at least that amount to creditors. 

The specific types of property that can be exempt in bankruptcy is outlined by state bankruptcy laws. 

State & Federal Bankruptcy Exemptions 

Each state has defined bankruptcy laws that outline exemptions. There are also federal bankruptcy exemption laws. Some states require you to use your state exemption laws and other states allow you to choose between using state or federal exemption laws. If you are given the choice between both sets of exemption laws, you will choose the exemptions that offer the greatest protection of your assets. It is important to know that you cannot use both and will have to choose one. 

The state exemption laws that apply to you depends on where you have been living for the last two years. Exemptions can really vary from state to state, with some state exemptions offering greater coverage. It is important to take the time to do an inventory of your assets and also look into your state exemption laws to better understand the property you can keep!

If you are considering declaring bankruptcy, we’re here to help. Contact us today to schedule a consultation.