Chapter 7 Bankruptcy: What Can You Keep?

If you're considering filing for bankruptcy, you might have images of repo men coming into your home, taking your possessions, selling them to the bank, and leaving you empty-handed. This may be how bankruptcy looks in cartoons. But, in reality, there are laws that help protect your property during bankruptcy. These protections are called bankruptcy exemptions.

What Are Chapter 7 Bankruptcy Exemptions?

Bankruptcy exists to help people get back on their feet and regain control of their finances. To help with this, the government created a set of exemptions that allow individuals to maintain their quality of life while resolving their issues with creditors.

If your property is exempt, you get to keep it after filing bankruptcy. If you have property that isn't exempt, your bankruptcy trustee can sell it and divide the proceeds among your unsecured creditors.

How Do Bankruptcy Exemptions Work?

Most of the Chapter 7 bankruptcy exemptions have a limit. This means that anyone filing bankruptcy can protect certain types of property up to a certain amount. For example, say your car is worth $3,500, and the exemption for motor vehicles in your area is up to $6,000. In this case, you'd be allowed to keep your vehicle because its value is lower than the exemption amount.

What if your vehicle was worth $9,000? In this case, your trustee could sell the vehicle for $9,000. They would then give you the $6,000 that's protected by an exemption and divide the remaining $3,000 amongst your creditors.

What's the Difference Between State and Federal Chapter 7 Bankruptcy Exemptions?

The type of property or assets you can exempt and the exemption limits are determined by the state you live in (or previously lived in if you've moved recently). There are federal bankruptcy exemptions and state bankruptcy exemptions. While most states require filers to use the state exemptions, 16 states allow you to choose whether to use the federal bankruptcy exemptions or your state's exemptions.

If you happen to live in one of the states that allow you to choose between the two sets of exemptions, it's important to know that you can’t choose some exemptions from one set and some from another. You have to pick one or the other. Whichever exemptions you choose to use can be combined with federal nonbankruptcy exemptions as well.

Qualifying for State Exemptions

If you've lived in the same state for the past two years or more, you'll file your bankruptcy case as a resident of that state. But if you haven't been in the same state for the last two years, your place of “residence” will likely be the place where you spent the majority of your time for the six months leading up to two years ago.

For example, say you've been living in Arkansas for the past year and a half. Before living in Arkansas, you lived exclusively in Texas for four years. Because you haven't been living in Arkansas for the required two years, you'll be counted as a Texas resident. Texas is one of the 16 states that allows residents to choose between state and federal exemptions, so you'll get to make this choice when you file.

Upsolve has articles on the exemptions in every state.

The Most Common Chapter 7 Exemptions

Though every state handles Chapter 7 bankruptcy exemptions a little differently, some common types of property are usually protected. For example, your car, home, and clothes are usually protected. But collectibles, investments, and vacation homes are less likely to be exempt. Chapter 7 bankruptcy exemptions vary by state and federal laws, so the following is only a rough guideline. For more specific information, research the laws in your area or consult with a bankruptcy attorney.

Real Property (aka Your House!)

If you don't have much or any equity in your primary residence, it's likely protected by a homestead exemption. Note that this doesn't include things like second homes and vacation homes, only your residence. That said, you have to be current on your mortgage payments when you file your bankruptcy case. Otherwise, the bank can take your house back, no matter the exemption.

Vehicles

The requirements for keeping your car are similar to the requirements for keeping your house. If you own your car outright and the value is within the exemption limit, you can likely keep your car. If you're still paying off your car, there are a few things to consider.

If You Want to Keep Your Car...

... And you're leasing, you may be able to assume your car lease. Assuming your lease is just the legal way of saying that you plan to keep the car and continue making payments. After you file for bankruptcy, you'll be required to submit a statement of intentions. This statement gives you a chance to keep any of your debts that you would like to keep making payments on. If your car is on a lease and you want to keep making payments on it, you can assume the lease.

... And you have a car loan, you may be able to reaffirm the loan: Sometimes, instead of repossessing your car, your car loan lender will offer to reaffirm your loan. Keep in mind that if you reaffirm your debt you'll still be responsible for any loan payments you miss. So, consider your options carefully and only reaffirm your debt if you believe that you'll be able to continue making payments on it.

... And you're upside-down on your car loan, you may be able to redeem the car loan. Depending on what your financial situation is when you file bankruptcy, you may decide to choose a 722 redemption for your vehicle. Redemption is a way of reducing the amount of money you owe on your car loan if the car's market value has dropped since you first took out the loan.

For example, if you originally took out a $10,000 loan to pay for your vehicle, but it is now only worth $7,000, a redemption will bring your loan amount down to $7,000. The catch is that you must pay that $7,000 in one lump sum.

If You Want to Give Up Your Car...

If you don’t want to keep your vehicle, you can indicate this on your statement of intent and voluntarily surrender the vehicle. This means you give it back to the bank or financial institution that gave you the car loan.

Personal Items and Household Goods

In addition to big items like your home and your vehicle, most of your everyday belongings are also protected by exemptions. This is because lawmakers decided that no matter your debt issues, you should be able to keep these items.

The rules vary by state, but, for the most part, your clothes, furniture, and appliances should be safe to keep. But more expensive items may not be exempt. For example, things like designer clothes, expensive jewelry or handbags, and ornate furniture might be evaluated by your trustee. There may be exemptions to protect these items, but it’s important to know that they’re not always protected.

Wages, Benefits, and Retirement Accounts

Wages that you earned before your filing date but won't receive until after filing your case are usually only partially protected. Any post-bankruptcy earnings are completely exempt in a Chapter 7 filing.

Welfare benefits and retirement accounts are almost always protected — but only if you list them on your paperwork. Social Security, unemployment benefits, 401(k), disability benefits, veteran benefits, etc., are all protected by federal law. That said, if you have a lot of money saved in any of these accounts, it might be wise to talk to an attorney.

Wildcard Exemptions

Federal bankruptcy law has a wildcard exemption for individuals filing any type of bankruptcy. Some states have wildcard exemptions as well. The purpose of a wildcard exemption is to protect things that are important to you but don't necessarily fit into one of the existing categories. You can use this exemption to protect unique valuables like family heirlooms, wedding dresses, collectibles, or artwork.

Typically, the wildcard exemption can also be added to the exemption limit of another category. Say your vehicle's equity is just over the exemption limit in your area. In this case, you could add your wildcard exemption to protect the value of your car that's over the vehicle exemption limit.

How To Claim Your Exemptions

To claim your Chapter 7 bankruptcy exemptions, you must list them on your Schedule C. It’s important to list all the property that you want to protect on your Schedule A/B and again on your Schedule C. Anything that you don't list on either form won't be counted as exempt even if it's eligible. This means that if your property falls within your exemption limit but you don't list the property and claim an exemption, your bankruptcy trustee is still allowed to sell it.

What About Non-Exempt Property?

Non-exempt property is anything that the law doesn’t protect. As mentioned above, second homes or vehicles, extravagant jewelry, family heirlooms, collectibles, antiques, artwork, recreational vehicles like boats, and other luxury items are generally non-exempt.

Fortunately, if your trustee allows it, you might be able to buy back most of your non-exempt items. While you may not be able to recover everything, this — plus your wildcard exemption — should help you save the majority of your non-exempt property, assuming you don't own anything extravagant.

Let's Summarize...

Exemptions protect most of your day-to-day property in a bankruptcy filing.

The more effort you invest in learning your exemption laws, the more you'll be able to keep during your bankruptcy. Before you submit your filing, take the time to research your exemption rules or speak with a bankruptcy attorney about how exemptions can protect the property you care about the most.