Here is an overview of bankruptcy exemptions.
Bankruptcy exemptions play a significant role in both Chapter 7 and Chapter 13 bankruptcy because exemptions protect your property from creditors. In Chapter 7 bankruptcy, you can keep property covered by a bankruptcy exemption. In Chapter 13 bankruptcy, exemptions help keep your plan payments low. Read on to learn more about bankruptcy exemptions and how they work, including:
- what bankruptcy exemptions are
- how to apply exemptions in Chapters 7 and 13, and
- the differences between state and federal bankruptcy exemptions.
Learn more about using different types of bankruptcy exemptions.
What Are Bankruptcy Exemptions?
Exemptions allow you to keep some assets safe in bankruptcy, such as an inexpensive car, professional tools, clothing, and a retirement account. If you can exempt an asset, you don't have to worry about the bankruptcy trustee appointed to your case taking it and selling it for your creditors' benefit or paying to keep it. (We explain how exemptions work in Chapters 7 and 13 below.)
Many exemptions protect specific property types, such as a motor vehicle or furniture, up to a particular dollar amount. Sometimes an exemption protects the entire value of the asset. Some states have a "wildcard exemption" that can be applied to any property you own.
How Do Bankruptcy Exemptions Work?
Exemptions always protect the same amount of property regardless of the chapter filed. However, what happens to "nonexempt" property you can't protect with a bankruptcy exemption will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy and Exempt Assets
Chapter 7 bankruptcy is a liquidation bankruptcy where the appointed trustee sells your nonexempt assets to pay your creditors. Exemptions help you protect your assets in Chapter 7 bankruptcy because the bankruptcy trustee can't sell exempt property.
For example, suppose your state has a $5,000 motor vehicle exemption, and you have one car worth $4,000. In that case, the exemption will cover all of the car's equity, and you can keep it. For more information about keeping a car in Chapter 7 and other property, see Exemptions in Chapter 7 Bankruptcy.
Chapter 13 Bankruptcy and Exempt Assets
A Chapter 13 bankruptcy allows you to keep all your property while paying some or all of your debt in a three- to five-year Chapter 13 repayment plan. But this benefit comes at a cost. You'll have to pay nonexempt creditors for the property you can't protect with an exemption.
Nonpriority unsecured creditors, such as credit card issuers, must receive at least as much as the value of the property you can't exempt. So in Chapter 13 bankruptcy, being able to exempt all or most of your property helps keep your monthly plan payment low.
Learn more about exemptions in Chapter 13 bankruptcy.
State and Federal Bankruptcy Exemptions
Each state has a set of bankruptcy exemptions, and federal law provides a federal bankruptcy exemption set, too. Some states require you to use the state exemptions, while others allow you to choose the state or the federal bankruptcy exemption set. But you must choose one or the other--you can't mix and match exemptions from two sets.
The state's exemption laws you'll qualify to use will depend on where you lived during the last two years, called the "domicile requirements." For more information about the differences between state and federal exemptions and domicile requirements, read Which Exemptions Can You Use In Bankruptcy?
Federal Nonbankruptcy Exemptions
A second set of federal exemptions called "federal nonbankruptcy exemptions" can be used along with your state's exemptions. For more information, see The Federal Nonbankruptcy Exemptions.
Need More Bankruptcy Help?
Did you know Nolo has made the law easy for over fifty years? It's true—and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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Helpful Bankruptcy Sites | Department of Justice U.S. Trustee Program United States Courts Bankruptcy Forms |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
FAQs
The exemptions are generally separated into exemptions that affect the real property and personal property. Exemptions determine what property (such as a home, car, or retirement account) you can keep in a chapter 7 bankruptcy, and how much you must pay to certain creditors in a chapter 13 bankruptcy.
What is an example of bankruptcy exemption? ›
What Are Bankruptcy Exemptions? Exemptions allow you to keep some assets safe in bankruptcy, such as an inexpensive car, professional tools, clothing, and a retirement account.
What are three debts that cannot be erased by filing bankruptcy? ›
Non-Dischargeable Debt Under Bankruptcy Law
- Debts left off the bankruptcy petition, unless the creditor actually knew of the filing.
- Many types of taxes.
- Child support or alimony.
- Debts owed to a child or ex-spouse arising from divorce or separation.
- Fines or penalties owed to government agencies.
- Student loans.
States Allowing Federal Bankruptcy Exemptions
| Alaska | Michigan | Pennsylvania |
|---|
| District of Columbia | New Jersey | Vermont |
| Hawaii | New Mexico | Washington |
| Kentucky | New York | Wisconsin |
| Massachusetts | Oregon | |
2 more rowsNot all debts can be discharged through bankruptcy, including child support, alimony, certain unpaid taxes, and more. Income tax debt is also very difficult, though not impossible, to get discharged. Most loan debt can be alleviated through bankruptcy.
What are three examples of exempt assets that cannot be taken from you? ›
Exempted property in a bankruptcy can include the car you need to drive to work and to the store for food. It can include the tools you need to do your job. It can include the house in which you live, and the furniture and appliances and other household goods that make the house your home.
What is the exception to bankruptcy stay? ›
The most commonly sought exceptions are actions by parties to securities contracts to close out open positions; eviction of a debtor by a landlord where the lease has been fully terminated prior to the bankruptcy filing; actions by taxing authorities to conduct tax audits, issue deficiency notices, demand tax returns ...
Do you lose all credit cards after Chapter 7? ›
Even though you lose your cards during bankruptcy, you'll still be able to obtain a credit card after filing, possibly sooner than you might think. Once the Chapter 7 bankruptcy closes, you can start rebuilding your credit.
How often are bankruptcies denied? ›
“In my experience, about 15% don't even get approved. From there, they can be dismissed before the process is completed for a lot of reasons.” Why would a Chapter 7 bankruptcy be denied and how can you avoid it? Let's take a look.
How long can I stay in my home after filing Chapter 7? ›
Depending upon where you live, you may be able to remain in your home for six months or more after your Chapter 7 bankruptcy has been finalized. Once your bankruptcy is discharged, you will need to find another place to live.
Your home. Personal everyday items. Retirement accounts, pensions, and 401(k) plans. Burial plots.
Can you write off federal taxes in a bankruptcy? ›
You can wipe out or discharge tax debt by filing Chapter 7 bankruptcy only if all of the following conditions are met: The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy.
Can the trustee take my tax refund after filing Chapter 7? ›
You've filed for bankruptcy, but could really use that tax refund you expect this year. You're not the only one who wants it. Odds are the bankruptcy trustee is also eyeing the money to use to pay your creditors and, in many cases, the bankruptcy trustee will take your tax refund after discharge.
What cannot be wiped out by bankruptcies? ›
Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.
What bills Cannot be included in bankruptcy? ›
Loans, medical debt and credit card debt are generally all able to be discharged through bankruptcy. Tax debt, alimony, spousal or child support and student loans are all typically ineligible for discharge.
What can't be written off in a bankruptcy? ›
The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units ...
What are exceptions to bankruptcy means test? ›
Means Test Exemptions
If your debts are not primarily consumer debts then you are exempt from the means test. You are also exempt from the means test if you are a disabled veteran and incurred your debt primarily during active duty or performing a homeland defense activity.
What is the wildcard exemption for Chapter 7? ›
The Federal Wildcard Exemption
The federal bankruptcy exemptions provide a wildcard exemption for $1,475 and up to an additional $13,950 of any unused homestead exemption and can be used to protect any property of your choosing. (11 U.S.C. § 522(d)(5).) These figures reflect April 1, 2022, federal exemption amounts.
What is an allowable claim in bankruptcy? ›
An allowed claim secured by a lien on property in which the estate has an interest, or that is subject to setoff, is a "secured claim" to the extent of the value of the creditor's interest in the estate's interest in the property, or the amount subject to setoff.
Is retirement exempt from bankruptcy? ›
You can use bankruptcy exemptions to protect property you need to work and live, such as some equity in a home, a modest car, and household belongings. Fortunately, virtually all ERISA-qualified retirement accounts and pension plan funds are excluded from bankruptcy.
