Federal Bankruptcy Exemptions Explained

The laws that protect a person’s property from creditors are called exemptions. The exemptions listed in the U.S. Bankruptcy Code are known as the federal bankruptcy exemptions. They only apply in bankruptcy cases. The federal government makes its federal bankruptcy exemptions available to anyone who files bankruptcy regardless of what state they file in. But each state has the right to restrict its residents to using the state exemptions. If so, they've “opted out” of the federal bankruptcy exemptions. 

Filers in these opt-out states can only use the exemptions available under state law. The other states allow you to choose between the state and federal bankruptcy exemptions. But you can’t use both sets of bankruptcy exemptions — state and federal — in any bankruptcy. You also can’t mix and match. If you choose the federal bankruptcy exemptions, you can only use the federal bankruptcy exemptions. The same is true if you decide to use state bankruptcy exemptions.

What Are Bankruptcy Exemptions For? 

A Chapter 7 bankruptcy erases all of your dischargeable debts. In return, you agree to give up certain property so it can be sold to pay your debts. Exemption laws protect your property. Anything you own that's worth less than an available exemption is considered exempt property. You can keep all exempt property. Non-exempt property isn't protected by any exemptions or exceeds the value of the available exemption. If you own non-exempt property, it will be sold by the bankruptcy trustee as part of the Chapter 7 bankruptcy process. 

How Are Exemptions Limited? 

Exemptions are limited by specifying the specific type of property they protect. Additionally, with some exceptions, exemptions have a dollar limit. The limits are updated every three years. The most recent update went into effect in April 2022. 

Why Are There Dollar Limits in the Federal Bankruptcy Exemptions? 

Exemptions are there to make sure you get a fresh start without having to completely start from scratch once your discharge is entered. For example, the law recognizes that everyone needs a vehicle to get to and from work, grocery shopping, doctor’s appointments, and the like. So, the federal bankruptcy exemptions include a motor vehicle exemption. But, you don’t need a $50,000 car you own free and clear to do these things. So, the motor vehicle exemption is limited to a certain dollar amount. 

Some federal bankruptcy exemptions have a limit for the category and each item within that category. For example, the federal bankruptcy exemptions allow you to exempt up to $14,875 in household goods, furnishings, appliances, clothes, and books. This is the total amount of value you can retain in this category during your Chapter 7 bankruptcy. But, there’s also a $700 per item exemption limit. Because, you should be able to keep your coffee pot, but you don’t need a $5,000 espresso machine. 

What Kind of Exemptions Don’t Have a Dollar Limit? 

Some exemptions don’t have a dollar limit. Instead they protect 100% of the value of things like qualifying retirement accounts and Social Security benefits. 

Federal Homestead Exemption

The federal bankruptcy exemptions include a homestead exemption for real property. If you own (rather than rent) your home, you can protect up to $27,900 of equity in the real property. If your mortgage balance is greater than the value of your home, you have no equity. 

Not Using the Homestead Exemption? No Problem! 

If you don’t own real property, or you don’t have any equity you’d need to protect, the federal bankruptcy exemptions allow you to use up to $13,950 as an additional wildcard exemption.

The Wildcard Exemption

Wildcard exemptions are a catch-all category of exemptions that allow you to apply all or a portion of the exemption to an item that belongs in another category or doesn't have a category at all. 

For example, if you have a vehicle worth $5,000 you can only exempt $4,450 of its value using the federal exemption for motor vehicles. However, you could exempt the remaining $550 of its value using part of the federal wildcard exemption. 

Personal Property and the Federal Bankruptcy Exemptions 

If you don’t own real estate, the personal property exemptions will be the most interesting to you. Currently, federal bankruptcy exemptions provide protections for the following categories:       

• $4,450 for your motor vehicle

• $700 per individual item with a $14,875 aggregate value on household goods, furnishings, appliances, clothes, books, animals, crops, musical instruments

•  $1,874 for jewelry

• $2,800 for tools of the trade including implements and books health aids

• Professionally prescribed health aids — unlimited

For married couples, filing jointly, all of the dollar amounts listed above are doubled. So the homestead exemption for a married couple filing jointly would be $55,800 instead of $27,900 as long as both spouses have an ownership interest in the property. 

Other Types of Assets

Real and personal property aren't the only types of assets protected by the federal bankruptcy exemptions. Federal bankruptcy exemptions also protect so-called intangible assets like IRAs, pension plans, tax-exempt retirement accounts, and cash value life insurance. Income from sources like Social Security, public benefits, veteran’s benefits, alimony, and child support is 100% protected.

A list of other assets protected under the federal bankruptcy exemptions includes:

• $14,875 in loan value, accrued dividends, or interest in a life insurance policy

• Wrongful death recovery for a person you were a dependent of

• Personal injury recovery up to $27,900 not including for pain and suffering or for actual pecuniary loss

• Loss of future earnings payments

• IRAs and Roth IRAs up to $1,512,350

• Crime Victims compensation

• Unmatured life insurance policy not including credit life insurance

• Disability, unemployment compensation, and illness benefits

• Life insurance payments for someone if you were their dependent and relied on them for support

States That Allow Residents to Use Federal Bankruptcy Exemptions

Depending on what state you’ve been living in for at least two years when your case is filed, you’ll be able to use either that state’s exemptions or the federal bankruptcy exemptions, if the state hasn’t “opted out.” Currently, the following states allow their residents to use the federal bankruptcy exemptions:

• Alaska

• Arkansas

• Connecticut

• District of Columbia

• Hawaii

• Kentucky

• Massachusetts

• Michigan

• Minnesota

• New Hampshire

• New Jersey

• New Mexico

• New York

• Oregon

• Pennsylvania

• Rhode Island

• Texas

• Vermont

• Washington

• Wisconsin.

Some states have more generous exemption amounts than those available under federal law. Depending on what types of property you have, remember that you can choose to use your state’s bankruptcy exemptions (plus any available federal nonbankruptcy exemptions) even though your state allows the use of federal bankruptcy exemptions. 

Let’s Summarize…

The federal bankruptcy exemptions are part of the federal law. If you’re not in an opt-out state you can choose to use the federal bankruptcy exemptions when you file bankruptcy. The exemption system is the same for Chapter 7 and Chapter 13 bankruptcy.