Exemptions are a basic part of the bankruptcy system. People in debt owe money, but the federal government and state credit laws state that individuals looking to get out from under debt cannot be unduly punished through loss of basic property and necessities. This includes essentials like transportation, housing, professional tools, or other personal belongings.
What exemptions mean for you depends on the type of bankruptcy you file. Chapter 7 bankruptcy uses exemptions to determine what you keep and what becomes part of your settlement with your creditors. Chapter 13 bankruptcy uses exemptions to determine how much you will pay for nonpriority and unsecured credit that falls under the bankruptcy agreement.
You must understand how exemptions work before determining what kind of bankruptcy to file. It’s important to know how state law affects what property can be declared as exempt
Each state has different exemptions for bankruptcy. There are also federal bankruptcy exemption guidelines, with 17 states giving you a choice between state and federal guidelines. California even provides two separate state exemption guidelines. So, if you file in Denver, CO or Las Vegas, NV you have to follow Colorado or Nevada state guidelines only. But each state will have its own guidelines.
If given a choice, you must pick one guideline system and adhere to it for the duration of the bankruptcy. You can, however, also include federal nonbankruptcy exemptions where applicable. Check out the list of Federal Nonbankruptcy Exemptions here.
Follow this link and click on your state link to determine if your state follows federal exemption laws alongside the state’s laws. This will also layout how much you can exempt for specific pieces of private property.
How Do Exemptions Work?
If the value of all your property in a specific category comes out to less than or equal to the exemption amount available for your state, then you are eligible to keep that property.
Example: Arizona has a vehicle exemption law of up to $6000 dollars, and you own a car worth $4000. If you file Chapter 7 bankruptcy, then you can keep the car. If your car was worth more than the $6000, then a bankruptcy trustee would sell the care to pay off creditor and/or a car loan. However, in this case you would be paid the $6000 for the car exemption, with the remainder used for creditor payments.
Exemption also considers the cost of selling the item. If your property is close to the cost of the total exemptions allowed, and the cost incurred by selling the item exceeds the remaining amount after the exemption, then a trustee will not sell your item. This is falls under Property Abandonment law (see our page on Property Abandonment).
Also, be sure to read our page on property and exemption: What Property is Exempt in Bankruptcy?
What Exemption Rules Should I Follow?
There are two approaches to deciding what state’s rules you should follow:
- If you have lived in your current state of residence for the past two years (and your permanent resident in listed as in this state) then you use that state’s (or applicable federal alternatives) exemption rules for your bankruptcy filing.
- If you have recently moved (within the past two years), then read our page on “Bankruptcy Exemptions: Which State Exemption System Can You Use?” page to figure out the details.
Homestead Exemption Rules
Homestead exemptions work slightly differently than other exemptions. If you purchased your home (or other real property) within 40 months of filing within the state where you currently live, your exemption is capped according to that state’s exemption law. For example, Nevada state guidelines cap Homestead exemptions up to $550,000. But, and this is important, this cap isn’t applicable for property purchased from the proceeds of selling another home in the same state. See Chapter 7 Homestead Exemption in Bankruptcy to learn more.
Bankruptcy Exemptions Specific to Your Filing
No matter what happens, you need to make a detailed list to inventory your property and exemptions. If you are filing Chapter 7, this will help you get the bigger picture on what property you will be able to retain, and what property could possibly end up in the hands of your trustee for sale. Make sure that you understand the options for exemptions in your state, and that you understand the best set of regulations that allow you to keep as much property as possible. Remember that just because you are in debt, that doesn’t mean you have to give up your valuables or family possessions at the demand of a creditor. This is your opportunity to take your life back, so make sure that you do it on the best terms available.