Chapter 7 bankruptcy exemptions allow you to protect property during your bankruptcy. Usually these exemptions allow you to keep most of your day-to-day property.
Written by Kristin Turner, Harvard Law Grad.
Updated September 23, 2020
If you're considering filing for bankruptcy, you might have images of repo-men coming into your home and taking your possessions, selling them to the bank and leaving you empty-handed.
While this may be the way bankruptcy looks in cartoons, in reality, the government created laws that help protect your property during bankruptcy. These protections are called the bankruptcy exemptions.
What Are Chapter 7 Bankruptcy Exemptions?
The purpose of bankruptcy is to help people get back on their feet and regain control of their financial situation. In order to help with this process, the government created a set of exemptions to help individuals maintain their quality of life, while still resolving their issues with creditors.
How Do Bankruptcy Exemptions Work?
Most of the Chapter 7 bankruptcy exemptions have a limit. This means that anyone fiing 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 would be allowed to keep your vehicle.
Say, however, that your vehicle is worth $9,000. In this situation, your trustee can sell your vehicle for $9,000. They would then give you $6,000 of the profits, and divide the remaining $3,000 amongst your creditors.
What's The Difference Between State And Federal Chapter 7 Bankruptcy Exemptions?
What you can exempt, and what your exemption limits are, is determined by the state you live in -- or have recently lived in. There are federal bankruptcy exemptions and state bankruptcy exemptions that can be combined with the federal nonbankruptcy exemptions.
While the majority of states require you to use their Chapter 7 bankruptcy exemptions, sixteen states allow you to choose between the federal bankruptcy exemptions and 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 complete set or the other.
Qualifying for State Exemptions
The state you file for bankruptcy in is usually determined by the state you have lived in for the past two years.
If you haven't lived in any state for at least two years, however, 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.
Here’s an example: Say you have been living in Arkansas for the past year and a half. Before living in Arkansas, you lived exclusively in Texas for 4 years. Because you haven't been living in Arkansas for the required two years, you will be counted as a Texas resident.
This means that you will choose between Texas' Chapter 7 bankruptcy exemptions or the federal bankruptcy exemptions.
The Most Common Chapter 7 Exemptions
Even though every state will handle Chapter 7 bankruptcy exemptions a little differently, there are some common types of property that are usually protected. For example, your car, home, and clothes are usually protected. However, collectibles, investments, and vacation homes are less likely to be exempt.
Again, the Chapter 7 bankruptcy exemptions will 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!)
Depending on how much equity you have in the home, your primary residence could be exempt from your Chapter 7 bankruptcy filing. However, this does not include things like second homes and vacation homes.
Your home is protected if its equity is below the exemption limit or it lacks equity all together. But, exemptions don't apply to mortgage companies. You have to be up-to-date on your mortgage payments when filing, otherwise the bank can take it back, no matter the exemption.
The requirements for keep your car are similar to the requirements for keep your house. If you own your car outright and the value is within the exemption limit, you can likely keep your car. However, if you are still paying off your car, there are a few things to consider.
Keeping Your Car
Assuming Your Car Lease
If you lease your car, your options will be pretty similar. After you file for bankruptcy, you will 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. “Assuming” your lease is just the legal way of saying that you plan on keeping the car and continuing your payments.
Sometimes, instead of repossessing your car, your car loan lender will offer to reaffirm your loan. Keep in mind that reaffirming your debt means you will still be held responsible if you miss any payments on the loan. So, consider your options carefully and only reaffirm your debt if you believe that you will be able to continue making payments on it.
Depending on what your financial situation is at the time of filing, 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 its 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.
Giving Up Your Car
If you don’t want to keep your vehicle, you can indicate this on your statement of intent.
There are some circumstances where you may choose not to try to keep your vehicle. In these situations, you can choose to surrender the back to the bank your car loan is through.
Personal Items and Household Goods
Aside from big items, like your home and your vehicle, a good portion of your everyday belonging are also protected by an exemption. This is because their value is too low to make it worth the trouble of reselling.
The rules, however, will vary depending on your state. But, for the most part, your clothes, furniture, and appliances should be safe to keep.
However, this might not apply to more expensive items. For example, things like designer clothes, expensive jewelry or handbags, and ornate furniture might be evaluated by your trustee. You may still have an exemption that protects 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 don'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.
However, if you have a lot of money saved in any of these accounts, it might be wise to talk to an attorney.
The purpose of a wildcard exemption is to protect something that is important to you but doesn’t necessarily fit into one of the existing categories. You can use it to protect unique valuables like family heirlooms, wedding dresses, collectibles, or artwork.
Spillover from another exemption
A 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 is over the vehicle exemption limit.
How To Claim Your Exemptions
To claim your Chapter 7 bankruptcy exemptions, you must list them under your Schedule C: The Property You Claim As Exempt. It’s important to list all the property that you want to protect on your Schedule C.
Anything that you do not claim as exempt, regardless of if it’s eligible for protection or not, will not be counted as exempt. This means that even if your property falls within your exemption limit but you do not claim it, your bankruptcy trustee is still allowed to sell it.
What About Non-Exempt Property?
Non-exempt property will be anything that the law doesn’t protect. As we 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 - coupled with your wildcard exemption - should help you save the majority of your non-exempt property.
Bankruptcy Exemptions Help Protect Most of Your Day-to-Day Property
Chapter 7 bankruptcy exemptions can be a tricky subject, with lots of very specific rules, requirements, and terms. However, they can also save you a lot of money and property during your bankruptcy process.
The more effort you invest in learning your exemption laws, the more you will 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.