What Are the Delaware Bankruptcy Exemptions?

What are the Delaware bankruptcy exemptions and why are they important in a Chapter 7 bankruptcy? 

Whenever you’re thinking about filing bankruptcy, it’s important to take bankruptcy exemptions into account. Exemptions are laws that allow you to protect both your real and personal property, up to varying amounts. This matters because the basic premise of Chapter 7 bankruptcy case is that your turn over all of your property to the bankruptcy estate, where it can be sold by a bankruptcy trustee to share equally among your unsecured creditors. Now if you truly were to turn over everything when you file bankruptcy, you wouldn’t be able to effectively achieve a fresh start, which is a key intention of bankruptcy relief. So exemptions allow you to protect your property to maintain a basic standard of living that allows you to move forward when your case is over. You should note, however, that this won’t extend to luxury items or investment property. Any nonexempt items would most likely have to be turned over to the trustee and liquidated for your creditor’s benefit. 

Does Delaware allow the use of federal bankruptcy exemptions?

Each state has its own set of bankruptcy exemptions available to its residents. There is also a set of exemptions available at the federal level in the United States Bankruptcy Code, which is part of the U.S. Code or U.S.C., and each state can decide whether or not to offer the federal exemptions as an alternative option for filers. Only a minority of states offer a choice. Delaware, like the majority, has opted out of allowing its residents to use the federal bankruptcy exemptions. So, if you’re filing bankruptcy in Delaware, you’ll be limited to only using the Delaware state exemptions. You can, however, also use any of the federal nonbankruptcy exemptions if you qualify to supplement the state exemptions. 

There is a circumstance where you might be using exemptions other than Delaware state exemptions even as a Delaware resident. This comes into play if you moved to Delaware less than two years ago. There’s a rule that you have to have lived in a state for at least two years, called the 730-day rule, to qualify to use their state exemptions. So, if you’re a recent Delaware transplant, you’ll need to look back to the six-month period right before two years before your filing date. This sounds more confusing than it is. Essentially you need to go back to two and a half years from now and determine where you lived for the majority of that initial 6-month period to determine which state exemptions should apply. This is called the 180-day rule. 

Delaware Bankruptcy Exemptions

Under the Delaware state exemptions, married couples filing jointly can double the exemption amount for some exempt property when they both have an ownership interest, including motor vehicles and tools of the trade. They can’t double the exemption of their homestead. The exemption limit stated below has the same ceiling, whether you file as an individual or jointly. 

Real Property - the Delaware Homestead Exemption

Delaware offers a very generous homestead exemption to protect the equity in your home. With this exemption, you can protect up to $125,000 of equity in real property or a manufactured home used as a principal residence. Additionally, any interest that a debtor has in real estate held as a tenant by the entirety is exempt under the homestead provision. Keep in mind, however, as stated above, married couples can’t double this exemption. 

However, this homestead exemption is completely unavailable if the debtor owes a debt arising from:

• A violation of state or federal securities law;

• Fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of a security registered under federal law; or

• Any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the prior five years.

Personal Property Exemptions

Delaware filers can protect up to $15,000 of equity in a motor vehicle, if necessary for your employment. Married couples filing jointly can each protect one vehicle for this purpose, up to the stated amount. 

The below items are protected in full under Delaware law and not subject to the $25,000 limit:

• family bible and books 

• family pictures 

• pew or seat in a place of public worship

• burial plot 

• you and your family’s clothing

• sewing machines and pianos for personal use.

Beyond these listed items, Delaware has a unique take on any remaining personal property exemptions. There is a limit for all of a filer’s property referenced in two particular statues (Del. Code Ann. tit. 10, §§ 4914 and 4915). The exemption limit is $25,000 for the total aggregate fair market value for any equity in real property other than the principal residence, motor vehicle(s) and tools of trade. The only exceptions to the property contained in these two sections are your principal residence and retirement accounts. Everything else is included in that $25,000 total. 

Miscellaneous Personal Property Exemptions

Delaware does allow exemptions for tools necessary for your business up to $15,000. As indicated above, these tools of the trade can include your car. Del. Code Ann. tit. 10, § 4902

Delaware exemptions also cover the property rights of a business partnership in full. Del. Code Ann. tit. 9, §15-504(d)

Delaware also offers a minimal wildcard exemption of an additional $500 for any other personal property if the filer is the head of household. They can’t, however, apply this to tools of the trade. Del Code Ann. tit. 10, § 4903

Money Benefits

Property that you can protect in bankruptcy does not have to always be physical, tangible property. Property can also encompass certain types of money payments or benefits. 

For example, Delaware filers can protect up to 85% of any earned but unpaid wages. Del. Code Ann. tit. 10, § 4913) Also, any funds set aside in an educational savings plan like Delaware college investment plan accounts or Delaware ABLE accounts can be exempt. Del. Code Ann. tit. 10, § 4916. There are some limits to this, however, in that any funds contributed in the year before filing for bankruptcy that exceeds either $5,000 or the average of the two years of contributions, whichever is higher, are not exempt. 

For the college investment plan, you can only protect up to the amount allowed in the Internal Revenue Code. That amount, however, is not a specific dollar amount, rather you are limited to not contributing excessively beyond the amount needed to provide for the qualified higher education expenses of the beneficiary. (Internal Revenue Code § 529(b)(6))

The below life insurance and insurance benefits or proceeds are protected in full or to the amount stated:

• Life insurance proceeds, group life insurance policy or proceeds, and life insurance proceeds if the policy prohibits using them to pay creditors. (Del. Code Ann. tit. 18, § 2725, 2727, 2729)

• Annuity contract proceeds to $350 per month. (Del. Code Ann. tit. 18, § 2728) 

• Fraternal benefit society benefits. (Del. Code Ann. tit. 18, § 6118)

• Health or disability benefits. (Del. Code Ann. tit. 18, § 2726)

Other Delaware Exemptions

Filers in Delaware can also rely on the following public benefits being protected in full. This is the case for all residents of Delaware, whether or not they happen to be in bankruptcy:

• Aid to the blind (Del. Code Ann. tit. 31 § 2309)

• Aid to aged, disabled, AFDC, general assistance (Del. Code Ann. tit. 31 § 513)

• Unemployment compensation (Del. Code Ann., tit. 19, § 3374)

• Workers' compensation (Del. Code Ann., tit. 19, § 2355)

Filers in Delaware can also rely on the protection of pension or retirement benefits, regardless of bankruptcy status as follows:

• Delaware filers who collect a pension after serving on the police force can protect their police officers’ pensions in full. (Del. Code Ann. tit. 11, § 8803)

• State employees' pensions are also fully protected under Delaware exemptions. (Del. Code Ann. tit. 29, § 5503)

• Delaware filers who are volunteer firefighters can exempt their pension in full. (Del. Code Ann. tit. 16, § 6653)

• IRAs, Roth IRAs 401(k)s and other retirement plans, including inherited retirement assets, are also exempt under Del. Code Ann. tit. 10, § 4915. 

There is, however, a federal bankruptcy law to take into account which automatically exempts all tax-exempt pensions and retirement savings accounts from bankruptcy, even if you are using state law exemptions. 11 U.S.C. § 522(b)(3)(C). The law protects up to $1,283,025 of IRAs under section 408 or 408A of the Internal Revenue Code.

Filing Chapter 7 Bankruptcy? 

There are a lot of factors to consider when you’re thinking about filing for bankruptcy. It can be helpful to get legal advice before you make any decision about going forward. The good news is that most bankruptcy attorneys offer a free consultation, so you can meet with a bankruptcy lawyer to discuss your options without commitment. 

Meeting with a bankruptcy attorney allows you to confirm if filing Chapter 7 bankruptcy is the best path to debt relief in your financial circumstances. You might find, based on your priorities and goals, that Chapter 13 bankruptcy is a better choice. If that is the case, you should give careful consideration to hiring a bankruptcy attorney to help you through this long and more complicated process. 

If, however, you are looking to file a straightforward Chapter 7 bankruptcy and you can’t afford to hire an attorney, you can move forward on your own. While this prospect might be intimidating, there are resources available to assist you through the process. You can check out Upsolve’s screening tool to see if you qualify to use their free web app to prepare for your Chapter 7 case.