What Are Bankruptcy Exemptions?

Bankruptcy exemptions are laws that protect your property in bankruptcy. Exemption laws exist in both the Bankruptcy Code and in state law. The exemptions contained in state law often protect your property from creditors even if no bankruptcy case is filed. 

Property that's exempt can't be sold for the benefit of your unsecured creditors. To protect your property, you have to claim an appropriate bankruptcy exemption when filing your bankruptcy petition. If you don't claim any exemptions or you claim the wrong exemption, the property isn't protected from the Chapter 7 bankruptcy trustee.

Why Do Bankruptcy Exemptions Exist? 

Bankruptcy exemptions level the playing field. Every bankruptcy filer can protect certain exempt property so getting a fresh start doesn’t require them to start from scratch. In the United States, more than 95% of all Chapter 7 bankruptcy filers are able to protect all of their property using bankruptcy exemptions.^[1] 

Who Can Claim Bankruptcy Exemptions?

Exemption laws exist to protect people, so only individuals can claim bankruptcy exemptions. When a business files a Chapter 7 bankruptcy case, the business closes and its property is either returned to secured creditors or sold to pay unsecured creditors. Individuals and married couples don't go out of business like that, so the exemption system allows them to protect certain property. 

How Do Spouses Choose Bankruptcy Exemptions?

When a married couple files a joint bankruptcy petition, each spouse is entitled to claim bankruptcy exemptions for property they own. This means each spouse can claim bankruptcy exemptions for jointly owned property. For example, most states allow a married couple to double the exemption for household goods and similar personal property.

How Does Someone Claim Bankruptcy Exemptions?

Bankruptcy exemptions are claimed — or listed — on Schedule C. Schedule C is one of the forms that's submitted to the bankruptcy court as part of a bankruptcy case. It lists all of the property you claim as exempt along with the state law or Bankruptcy Code provision that protects it.

What Kind of Property Do Bankruptcy Exemptions Protect? 

Federal law and state laws protect a lot of the same kinds of property, including: 

• Motor vehicles

• Personal property like household goods, furniture, and musical instruments 

• Health aids

• Tools of the trade

• Real estate that's your primary residence

• Retirement accounts, including IRAs

• Social Security benefits

• Life insurance 

• Unemployment benefits, unemployment compensation, and workers' compensation 

• Veteran’s benefits and other public benefits 

• Alimony and child support 

• Personal injury and crime victim awards 

Essentially, bankruptcy law makes sure that your basic stuff is protected. Some state exemptions and the federal bankruptcy exemptions even include what's called a wildcard exemption. A wildcard exemption can be used to protect property that's not covered by another exemption. 

What that means for you, depends on your state’s law. If you’ve lived in the same state for at least two full years, that state’s law will tell you two things:

1. What is protected by the state bankruptcy exemptions

2. Whether you’re able to claim the federal bankruptcy exemptions instead

If you haven’t lived in the same state for at least two years, check out this article on bankruptcy after moving and consider speaking to a bankruptcy lawyer about which set of exemptions you can use.  

Who Can Use the Federal Bankruptcy Exemptions? 

There are 31 states that have opted out of allowing their residents to use the federal bankruptcy exemptions. If you live in one of these opt-out states, you have to use the set of exemptions provided in your state’s law. You don’t get a choice. 

If your state hasn't opted out and you’ve lived there for at least two years when you file your bankruptcy petition, you can choose between state and federal exemptions. 

How Are Federal Bankruptcy Exemptions Different From State Bankruptcy Exemptions? 

Since state bankruptcy exemptions are different in every state, you can think of the federal bankruptcy exemptions as just another set of exemptions that works pretty much the same way. The only difference is that they’re considered federal law because they’re listed in the Bankruptcy Code. 

Federal bankruptcy exemptions are adjusted every three years. The last update took effect on April 1, 2022. States also adjust their exemption amounts occasionally. But each state makes these adjustments on its own timeline, so there isn’t much of a pattern. 

Upsolve has articles outlining each state's exemptions.

Federal Nonbankruptcy Exemptions

Not all federal exemptions originate in the Bankruptcy Code. There are certain federal nonbankruptcy exemptions that exist in another part of federal law, like the Social Security Act.

These federal exemptions protect certain property even when no bankruptcy case is filed. In a bankruptcy, eligible filers can use the federal nonbankruptcy exemptions in addition to the state bankruptcy exemptions. 

Exemptions Limits

Some things, like Social Security, other public benefits, and certain retirement accounts are protected no matter how much they’re worth. The exemption is unlimited. Other exemptions, typically for personal property and real estate used as a home, are limited by a certain amount. 

Why Are Personal Property Exemptions Limited? 

Take wedding rings for example. No one should have to give up their wedding ring to get debt relief, right? What if the wedding ring is worth $50,000? $100,000? Is it fair for someone to keep an asset that valuable while not paying their debt? Probably not. 

The Homestead Exemption 

The homestead exemption protects the equity in your home. Equity is the difference between the property’s value and the amount owed on your mortgage. If your house is worth less than your mortgage balance, you don’t have any equity. In that case, the federal bankruptcy exemptions and some state bankruptcy exemptions allow you to use all or part of the homestead as a wildcard exemption. 

If you have equity, your home is protected as long as the amount of the homestead exemption covers all of your equity. For example, if your home is worth $100,000 and you have a home mortgage of $80,000, your equity is $20,000. As long as the available homestead exemption under your state’s law is more than $20,000, the bankruptcy trustee can’t do anything. 

The Homestead Exemption and Your Mortgage

A mortgage is a voluntary agreement you made with the bank. The bank loaned you the money to buy the house. In return, you gave them the right to take the house back if you don’t pay them back. The homestead exemption doesn’t change that. 

As long as you’re current on your mortgage when your bankruptcy case is filed, and you stay current with your payments, the bank can’t take your home even if you file bankruptcy. 

Non-Exempt Assets

Not everything is protected by a bankruptcy exemption. Property not protected by an exemption law is called non-exempt property. Most people filing Chapter 7 bankruptcy are able to protect all of their property using the exemption system. 

What Happens to Non-exempt Assets in Bankruptcy?  

The bankruptcy trustee liquidates — or sells — non-exempt property to the highest bidder. The sales proceeds are then used to pay unsecured creditors who claim an interest in your bankruptcy estate. 

In some cases, a trustee may allow you to “purchase” the non-exempt equity in the property. In that case, the dollar amount you have to pay to keep your property is based on the value of the asset minus the exemption amount. 

So, if your property is worth $8,000 and the exemption is $6,000, you may buy back your non-exempt equity for $2,000. The trustee may allow you to do this to avoid the cost of selling the property. If the trustee sells the property, you’ll receive $6,000. The remaining funds are used to pay a portion of your unsecured debts, like credit cards and medical bills. 

Non-Exempt Assets and Chapter 13 Bankruptcy 

As long as the unsecured creditors get the value of the non-exempt assets through the Chapter 13 repayment plan, the filer is able to keep all non-exempt property. 

Do People Usually Lose Property in a Chapter 7 Bankruptcy Case?

Not at all. Most Chapter 7 cases filed in the United States are no-asset cases. This means the filer can get debt relief without giving up any of their property. In some cases, a filer may choose to get the much-needed debt relief by filing Chapter 7 bankruptcy even though they may lose certain items. After all, filing bankruptcy and eliminating tens of thousands of debt provides a much greater benefit than keeping a $2,000 piece of real estate that hasn't increased in value in a decade. 

If you’re worried about your state's exemptions or specific types of property and whether they're protected, consider speaking to a bankruptcy attorney. Most law firms offer free consultations for Chapter 7 bankruptcy cases, so the most you have to lose is an hour of your time. 

File on Your Own With Upsolve

If you don’t have anything that isn’t protected by an exemption and can’t afford to hire a law firm to help you file Chapter 7 bankruptcy, know that you don’t have to hire a bankruptcy attorney to file your case. If you’re eligible, you can use Upsolve’s free web app to prepare your bankruptcy forms. See how it works in our 10-step guide on how to file bankruptcy for free.