There are both federal laws and state laws that apply to bankruptcy and each set of laws has its own bankruptcy exemptions. The federal government makes its federal bankruptcy exemptions available to anyone who files Chapter 7 bankruptcy regardless of what state they file in. But, each state has the right to restrict its residents to using the state exemptions, having “opted out” of the federal bankruptcy exemptions.
A Chapter 7 bankruptcy involves eliminating all of the dischargeable debts owed by an individual in exchange for that individual giving up their non-exempt property. Non-exempt property is property that is not protected by the exemptions allowed under the bankruptcy law or that that exceeds the value of the available exemption. The federal and state laws that designate certain property as protected and determine how much of its value is protected are known as bankruptcy exemptions.
There are both federal laws and state laws that apply to bankruptcy and each set of laws has its own bankruptcy exemptions. The federal government makes its federal bankruptcy exemptions available to anyone who files Chapter 7 bankruptcy regardless of what state they file in. But, each state has the right to restrict its residents to using the state exemptions, having “opted out” of the federal bankruptcy exemptions. If a state does not allow the use of federal bankruptcy exemptions, individuals filing for bankruptcy in that state can only use the state’s bankruptcy exemptions.
If the state does allow the use of federal bankruptcy exemptions, individuals filing for bankruptcy in that state can use either the federal bankruptcy exemptions or the state’s exemptions. You can’t use both sets of bankruptcy exemptions – state and federal – in any bankruptcy. You also can’t mix and match. If you elect to use federal bankruptcy exemptions, you must use all the federal bankruptcy exemptions. The same is true if you elect to use state bankruptcy exemptions.
Limits by Category v Limits per Item
Both federal and state bankruptcy exemptions are itemized by category based on the type of property the exemption applies to. In addition to the per-category limits, some exemptions also have a per-item limit for property in that category. For instance, 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. However, there is also a $625 per item exemption limit. Meaning no item in this category may be valued at more than $625. Not every category has per item limits and not every state allows exemptions for the same categories of property.
Personal Property and the Federal Bankruptcy Exemptions
For most filers, the most important bankruptcy exemptions available to them will be the personal property exemptions. Because in most instances, other than the homestead exemption, personal property will make up the majority of the property you will need to protect. Currently, federal bankruptcy exemptions provide protections for the following categories:
$25,150 in real property, including mobile homes and co-ops, or burial plots plus the unused portion of the homestead exemption up to $12,575 can be used for other property. (11 U.S.C. § 522(d)(1),(5))
$4,000 for your motor vehicle. (11 U.S.C. § 522(d)(2).)
$1,700 for jewelry. (§ 522(d)(4).)
$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).)
$2,525 for tools of the trade including implements and books health aids. (11 U.S.C. § 522(d)(6).)
$13,400 in loan value, accrued dividends, or interest in a life insurance policy. (11 U.S.C. § 522(d)(8).)
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 assets protected by federal bankruptcy exemptions. State or federal bankruptcy exemptions also protect other assets and sources of income.
Other Types of Assets
Federal bankruptcy exemptions also protect other assets like IRAs, pension plans, retirement accounts, and cash value life insurance. Certain sources of income are also protected under federal bankruptcy exemptions such as public assistance, Veteran’s benefits, alimony and child support. A list of other assets protected under the federal bankruptcy exemptions includes:
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)).
Retirement funds in a tax-exempt retirement account (including 401(k), 403(b), SEP and Simple IRAs) (11 U.S.C. § 522(b)(3)(c)).
IRAs and Roth IRAs to $1,362,800. (11 U.S.C. § 522(b)(3)(c)(n)).
Public assistance, social security, Veteran’s benefits and unemployment compensation. (11 U.S.C. § 522(d)(10)(a)).
Crime Victims compensation. (11 U.S.C. § 522(d)(11)(a)).
Alimony and child support needed for support. (11 U.S.C. § 522(d)(10)(d)).
Unmatured life insurance policy not including credit life insurance. (11 U.S.C. § 522(d)(7).
Disability, unemployment or 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)).
Up to $1,325 of any property (wildcard exemption) (11 U.S.C. § 522(d)(5)).
What Is a 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 $3,775 of its value using the federal exemption for motor vehicles. However, you could exempt the remaining $725 of its value using part of the federal bankruptcy wildcard exemption. Not every state has a wildcard exemption and some limit how much of the wildcard exemption can be applied to any individual item.
The amount of the wildcard exemption under the federal bankruptcy exemptions is updated every three years. Additionally, if you’re not claiming a homestead exemption, or not claiming all of it, the wildcard exemption is increased accordingly.
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 the 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
Just remember, as shown earlier, some state bankruptcy exemptions are much more generous than the federal exemptions depending on the category of property you are most interested in protecting. Even in states where federal exemptions are allowed, you can always use your state’s exemptions plus any availablefederal nonbankruptcy exemptions instead.
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