Bankruptcy Exemptions: What Property Can You Protect?

Estimated reading time: 7 minutes

One of the biggest concerns people have before filing bankruptcy is whether they will lose their home, vehicle, furniture, or other belongings. Bankruptcy does require a debtor to disclose property, but that does not mean everything is automatically taken.

Bankruptcy exemptions are legal protections that may allow a person to protect certain property, or a certain amount of equity in that property, during a bankruptcy case.

Quick Answer

Bankruptcy exemptions protect certain property from being used to pay creditors, subject to applicable limits and eligibility rules. The exemptions available depend on factors such as where you live, how long you have lived there, the type and value of the property, and the bankruptcy chapter you file. Exemptions can affect both Chapter 7 and Chapter 13 cases.

What Are Bankruptcy Exemptions?

When someone files bankruptcy, they must disclose their assets. Depending on the circumstances, those assets may include:

• A home or other real estate
• Vehicles
• Bank accounts
• Furniture and household goods
• Clothing and personal belongings
• Tools or equipment used for work
• Retirement accounts
• Insurance interests
• Legal claims or potential settlements
• Other property with financial value

Bankruptcy exemptions determine which property, or how much of its value, may be protected from creditors.

The U.S. Courts explains that Chapter 7 involves liquidation of nonexempt property, while debtors retain the right to protect property covered by applicable exemptions. In many Chapter 7 cases, there is little or no nonexempt property available for creditors. These are commonly known as no-asset cases.

What Does It Mean to Protect Equity?

Exemptions often protect equity, rather than simply protecting an item because you own it.

Equity is generally the property’s current value minus debts or liens secured by that property.

For example, imagine a vehicle is worth $18,000 and $14,000 remains on the auto loan. The owner has approximately $4,000 in equity.

Whether that equity is fully protected depends on the exemption available under the law that applies to the bankruptcy case.

This distinction can be especially important with homes, vehicles, valuable personal property, and other assets that have significant equity.

What Types of Property May Bankruptcy Exemptions Protect?

The specific protections depend on applicable law, but exemptions may cover categories such as:

A primary residence

A homestead exemption may protect a certain amount of equity in a primary residence.

Whether a home is fully protected depends on factors such as its value, mortgage balance, applicable exemption amount, ownership structure, the homeowner’s age, and other circumstances.

A vehicle

A motor-vehicle exemption may protect some equity in a car or truck.

For many people, maintaining transportation is important for employment, medical appointments, school, and daily responsibilities. However, the applicable exemption may not necessarily protect all equity in a particularly valuable or fully paid-off vehicle.

Household goods and personal belongings

Exemptions may provide protection for ordinary household property, including items such as:

• Furniture
• Appliances
• Clothing
• Electronics
• Household supplies
• Personal belongings

The amount and type of protection vary under the applicable exemption law.

Tools used for work

Some exemption laws provide protection for tools, equipment, or other property necessary for a person’s occupation or trade.

Retirement benefits

Certain retirement accounts and benefits receive significant protection under bankruptcy or other federal law. The extent of protection depends on the type of account and applicable legal requirements.

Other property

Depending on the exemption system available, protection may also exist for certain insurance proceeds, public benefits, injury-related payments, or other property.

Some jurisdictions also provide a wildcard exemption, which may allow a debtor to apply a limited exemption amount to property that is not covered, or not fully covered, by another exemption.

Because the rules vary, a particular asset should not be assumed to be protected without reviewing the law that applies to the case.

How Do Bankruptcy Exemptions Work in Chapter 7?

Chapter 7 is a liquidation bankruptcy. A trustee reviews the debtor’s assets, liabilities, exemptions, and other financial information.

The U.S. Courts describe Chapter 7 as a process involving the sale of nonexempt property and distribution of available proceeds to creditors. However, many individual Chapter 7 cases have no nonexempt property available for distribution.

If the debtor’s property is properly covered by applicable exemptions, the trustee generally does not liquidate that exempt value for unsecured creditors.

However, when an asset contains more equity than the available exemption protects, the trustee may evaluate whether selling the property would produce enough value to benefit creditors after considering:

• Valid liens
• The debtor’s exemption
• Costs associated with selling the property
• Administrative expenses
• The amount potentially available to creditors

Nonexempt equity does not automatically mean an asset will be sold, but it is an issue that should be evaluated before filing.

Worried about what could happen to your property?

 

The value of your home, vehicle, savings, and other assets can affect the bankruptcy chapter and exemption strategy that may apply to your situation.

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How Do Bankruptcy Exemptions Work in Chapter 13?

Chapter 13 operates differently from Chapter 7.

Instead of ordinarily liquidating property, an eligible individual proposes a repayment plan that generally lasts three to five years. Chapter 13 can allow a debtor to retain property while making payments under a court-approved plan.

Exemptions still matter because Chapter 13 contains what is commonly called the best-interests-of-creditors test, or liquidation test.

Generally, unsecured creditors must receive at least as much through the Chapter 13 plan as they would have received if the debtor’s assets had been liquidated under Chapter 7.

That means nonexempt equity may increase the minimum amount that must be paid to certain creditors through the plan.

So while Chapter 13 usually does not involve the trustee selling the debtor’s property, exemptions may still affect the cost and structure of the repayment plan.

What Might an Exemption Issue Look Like?

Consider two people who each own a vehicle.

The first owes nearly as much on the vehicle as it is worth, leaving relatively little equity. Depending on the applicable exemption, that equity may be fully protected.

The second owns a valuable vehicle outright. Because there is no loan balance, nearly the entire value represents equity. If the applicable exemption protects only part of that value, the remaining equity could become relevant in either Chapter 7 or Chapter 13.

The same basic analysis can apply to a house, bank account, valuable collection, or other property.

This is why the amount someone owes on an asset can be just as important as the asset’s market value.

Why Should Exemptions Be Reviewed Before Filing?

Bankruptcy exemptions should generally be evaluated before the petition is filed.

A pre-filing review may help identify:

• Property that appears fully exempt
• Assets containing possible nonexempt equity
• Questions about how property should be valued
• Liens or loans affecting equity
• Whether Chapter 7 could create a liquidation issue
• Whether nonexempt property could affect a Chapter 13 plan
• Documents needed to establish ownership or value

The analysis may also influence which bankruptcy chapter should be considered.

For example, someone with significant nonexempt equity may evaluate Chapter 13 differently from someone whose property is largely covered by exemptions.

That does not mean one chapter is automatically better. Eligibility, income, debts, goals, secured obligations, exemptions, and many other factors must be considered together.

Can You Choose Between State and Federal Bankruptcy Exemptions?

The Bankruptcy Code contains federal exemptions, but states may restrict whether residents can use them. Residency rules can also affect which state’s exemptions apply.

As a result, the available exemption system may depend on:

• Current residence
• Previous residence
• How long the debtor has lived in a particular state
• Applicable state law
• Bankruptcy Code residency requirements

Someone who recently moved from one state to another should be especially careful about assuming which exemptions apply.

Bankruptcy exemption amounts and requirements may also change over time, so current law should be reviewed when a case is being considered.

Are Exemptions Automatic?

No.

A debtor must disclose assets and claim applicable exemptions on the bankruptcy schedules. Trustees and creditors may have an opportunity to object to claimed exemptions under bankruptcy procedures.

The U.S. Courts defines an objection to exemptions as a trustee’s or creditor’s objection to a debtor’s attempt to claim certain property as exempt from treatment as property of the bankruptcy estate.

Accurate schedules and appropriate exemption claims are therefore important parts of the filing process.

Can Bankruptcy Eliminate a Lien on Exempt Property?

Not necessarily.

An exemption and a lien are different concepts.

An exemption may protect a debtor’s equity from administration by a bankruptcy trustee, but a valid mortgage, vehicle lien, or other secured interest generally does not disappear simply because the property is exempt.

The U.S. Courts notes that a bankruptcy discharge generally does not extinguish a lien on property.

Other bankruptcy rules may affect particular liens in certain circumstances, but exemption protection alone should not be understood as eliminating secured debt.

Key Takeaway

Filing bankruptcy does not automatically mean losing everything you own. Bankruptcy exemptions may protect certain property or equity, but the amount of protection depends on the applicable law, the property’s value, existing liens, and the bankruptcy chapter involved.

How May a Bankruptcy Attorney Assist?

A bankruptcy attorney may help evaluate exemptions before filing by:

• Reviewing assets and ownership
• Estimating equity in a home or vehicle
• Identifying potentially applicable exemptions
• Reviewing loans and liens
• Identifying possible nonexempt property
• Comparing how assets may be treated under Chapter 7 and Chapter 13
• Preparing bankruptcy schedules and exemption claims
• Discussing potential issues before the case is filed

Legal representation does not guarantee that every asset will be protected. Bankruptcy outcomes depend on the debtor’s property, equity, debts, exemption law, bankruptcy chapter, and individual circumstances.

Concerned About What You Could Keep in Bankruptcy?

Fear of losing a home, vehicle, or personal belongings can make it difficult to even consider bankruptcy. Understanding how exemptions may apply to your property can provide a clearer picture of the options available.

Brock & Stout may be able to assist you with:

• Reviewing your home, vehicle, and other property
• Explaining how bankruptcy exemptions may apply
• Comparing Chapter 7 and Chapter 13
• Identifying potential property issues before filing
• Discussing bankruptcy options based on your circumstances

Schedule a free consultation to discuss your bankruptcy options.

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Frequently Asked Questions

Will I lose everything if I file bankruptcy?

Not necessarily. Bankruptcy exemptions may protect certain property or equity. Whether an asset is fully protected depends on its value, liens, applicable exemption amounts, and other circumstances.

Can I keep my house if I file bankruptcy?

Possibly. The answer may depend on the home’s equity, applicable homestead exemption, mortgage status, bankruptcy chapter, and other factors.

Can I keep my car in bankruptcy?

A vehicle may be protected if available exemptions cover the relevant equity. Loan payments, liens, the vehicle’s value, and the bankruptcy chapter may also affect the analysis.

This article is for general informational purposes and is not legal advice. Bankruptcy laws and procedures can vary by case and jurisdiction. Results depend on the individual facts and circumstances of each case.