Bankruptcy Exemptions

One of the most confusing aspects of filing for bankruptcy can be the use of exemptions. Although the Bankruptcy Code is federal law, state law often governs the types and amounts of exemptions. As such, the specifics of a bankruptcy plan’s provisions can vary greatly from state to state. Below we will discuss some of the more usual exemption issues.

An exemption is a provision in the law that removes all or part of a debtor’s assets from control by the bankruptcy trustee. In a Chapter 7 bankruptcy, exemptions determine whether a debtor will be able to keep certain property. In a Chapter 13 bankruptcy, exemptions are used to determine how much will be paid to the unsecured creditors under the Chapter 13 plan.

Each state has a unique set of exemptions. In most situations, a debtor has no choice but to use the exemptions for the debtor’s state of residence. However, Congress has created federal bankruptcy exemptions, and some states permit a debtor to choose between the state and federal versions. A debtor may not use both systems, picking some exemptions from the state and some from the federal lists. A debtor must use one or the other.

An exemption will permit a debtor to keep property if its value is equal to or less than the provided exemption amount. For example, the federal exemption for an automobile is $3,450. If the equity in your car, which is its current market value minus any outstanding loans on it, is less than this amount the car remains yours. If the value is higher than the exemption amount, then a trustee may be able to sell the car to help pay your creditor, after giving you the value of the exemption. Whether a trustee actually will sell the car depends on how much money it will net the bankruptcy estate after all the costs of taking possession of and selling the vehicle are considered.

Even if an asset is worth more than a specific exemption, it may be protected. Some states have more generalized exemptions, such as for “tools of the trade”, which can be used to bump up an exemption in order to match the value of an asset if the extra exemption can be shown to have some relationship with the asset. Other states include a “wildcard” exemption, which can be applied to any asset or several assets, without needing to justify its use.

Exemptions exist so that a debtor need not fear the loss of basic property and personal possessions, while not permitting a debtor to take advantage of bankruptcy protection by sitting on significantly valuable assets. The exemption for household items, for example, is more than adequate to cover a debtor’s furniture and clothing. However, extremely valuable antiques, expensive sports cars, or other items that could net sufficiently large amounts of income to pay creditors may have to be forfeited when bankruptcy protection is sought.

Exemptions are an important and challenging aspect of the bankruptcy process. They require careful consultation with an experienced bankruptcy attorney, who can explain all the particular issues in your state and your circumstances.