The laws that protect your property from creditors are called exemptions. The exemptions listed in the Bankruptcy Code are called federal bankruptcy exemptions.
Written by Attorney Andrea Wimmer.
Updated December 28, 2020
The laws that protect a person’s property from creditors are called exemptions. The exemptions listed in the United States 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 have “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 elect 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 is worth less than an available exemption is considered exempt property. You can keep all exempt property. Non-exempt property is not protected by an available exemption or exceeds the value of the available exemption. If you own nonexempt 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 next update will go into effect on April 1, 2022.
Why are there dollar limits in the federal bankruptcy exemptions?
The purpose of the exemptions is to make sure you can start fresh but not completely “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, etc. 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 $13,400 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 $625 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?
Exemptions that don’t have a dollar limit, and instead protect 100% of the value are common for things like qualifying retirement accounts, social security benefits and the like.
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 $25,150 of equity in the real property. 11 U.S.C. § 522(d)(1). 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 $12,575 as an additional wildcard exemption. 11 U.S.C. § 522(d)(5).
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 no category at all.
For example, if you have a vehicle worth $4,500 you can only exempt $4,000 of its value using the federal exemption for motor vehicles. However, you could exempt the remaining $500 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:
$4,000 for your motor vehicle - 11 U.S.C. § 522(d)(2).
$625 per individual item with a $13,400 aggregate value on household goods, furnishings, appliances, clothes, books, animals, crops, musical instruments - 11 U.S.C. § 522(d)(3).
$1,700 for jewelry - 11 U.S.C. § 522(d)(4).
$2,525 for tools of the trade including implements and books health aids - 11 U.S.C. § 522(d)(6).
Professionally prescribed health aids - 11 U.S.C. § 522(d)(9).
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 $50,300 instead of $25,150, as long as both spouses have an ownership interest in the property.
Real and personal property are not the only types of assets protected by the federal bankruptcy exemptions.
Other Types of Assets
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:
$13,400 in loan value, accrued dividends, or interest in a life insurance policy - 11 U.S.C. § 522(d)(8).
Wrongful death recovery for a person you were a dependent of - 11 U.S.C. § 522(d)(11)(b).
Personal injury recovery up to $15,000 not including for pain and suffering or for actual pecuniary loss - 11 U.S.C. § 522(d)(11)(d).
Loss of future earnings payments - 11 U.S.C. § 522(d)(11)(e).
IRAs and Roth IRAs up to $1,362,800 - 11 U.S.C. § 522(n).
Crime Victims compensation - 11 U.S.C. § 522(d)(11)(a).
Unmatured life insurance policy not including credit life insurance - 11 U.S.C. § 522(d)(7).
Disability, unemployment compensation, and illness benefits - 11 U.S.C. § 522(d)(10)(c).
Life insurance payments for someone if you were their dependent and relied on them for support - (11 U.S.C. § 522(d)(11)(c).
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 its residents to use the federal bankruptcy exemptions:
District of Columbia
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.
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.