The federal bankruptcy exemptions generally allow Chapter 7 filers to keep most of their day-to-day property. Property that is “exempt” is protected during bankruptcy and can’t be taken by the court or creditors.
The most important piece to the puzzle. . .
When you file for bankruptcy, one of the biggest questions is whether or not you will be able to keep your property.
It is a common misconception that you have to give up all of your property when you file for Chapter 7 bankruptcy.
In fact, most people who file for Chapter 7 get to keep most of their day-to-day property under the Chapter 7 Federal Bankruptcy Exemptions.
There are two types: federal bankruptcy exemptions and state bankruptcy exemptions.
These property exemptions protect certain items from being taken during bankruptcy. Unless you have expensive property like a house or a car, the exemptions usually cover most things that you own.
Depending on where you live and how much you own, you may be able to use the federal bankruptcy exemptions to protect your property.
If you live in a state that lets you decide between your state’s bankruptcy exemptions and the federal bankruptcy exemptions, it is important that you understand both systems. This will help you pick whichever system protects more of your stuff.
This article will explain each of the federal bankruptcy exemptions and how they work to protect your property.
You pick the one that helps you keep more. . .
The difference between the state and federal bankruptcy exemptions will vary based on where you live.
Choosing between the state and federal systems will depend on what exactly you own and what exactly you intend to keep. It is a personal decision based on your specific situation.
Although some states allow you to use the federal exemptions, others do not. Meaning that, depending on the state you live in, you might be required to use your specific state’s bankruptcy exemptions instead of deciding whether the federal or state exemptions are more favorable toward your situation.
“Excusing” different property from the bankruptcy process. . .
The federal bankruptcy exemptions are the different categories of property that the government will let you keep after you file for bankruptcy.
They are called exemptions because they “exempt” or “excuse” certain property from being taken.
It is important to note that the exemptions represent a category of property. So, different items of property might fall under the same exemption.
Some exemptions apply to entire categories of property, regardless of how much that property is worth. Other exemptions require the total value of property to be less than a certain dollar amount in order for you to keep it.
Below is a list of each of the federal bankruptcy exemptions and what is included under each one. The amounts listed are per individual person. If you’re filing with a spouse, the amounts will double.
Let’s talk about the things you own. . .
** The Homestead Exemption (Your House)** Amount: up to $23,675 in equity. What It Covers: This exemption is important for homeowners. It covers real property such as family homes, co-ops, mobile homes, burial plots, etc. If your payments on the property haven’t surpassed $23, 675, then it’s likely that your property can be protected. If your payments is less than $23,675, then you may apply the remaining amount of the exemption to other property. If your payments exceed the $23, 675 amount that you’re allowed to protect under the exemption, then it’s likely that your property can be protected. What It Doesn’t Cover: It’s important to note that, if you own more than one home, this federal bankruptcy exemption might not cover all of them. This exemption does not cover any equity that you may have built up in rental properties or investment properties, despite the fact that it could be used to cover your primary residence.
Motor Vehicles (Your Car) Amount: $3,775 in equity per person. What It Covers: If you’re up-to-date on your payments, there is a possibility that the motor vehicle exemption can help you keep your car during Chapter 7. This is only allowed if your payments have made up less than $3,775. If you’ve paid more than that on your car, it might not be protected when you file. Keep in mind: Only one vehicle allowed per person.
Personal Property (Household Goods and Other Belongings) Amount: up to $12,625 total. The catch is: you can’t protect an item that’s worth more than $600 on it’s own. What It Covers: The federal bankruptcy exemption for personal property covers most of your day-to-day items. This likely includes items like clothing, appliances, animals, household goods, electronics, etc.
Jewelry (even the cheap stuff.) Amount: $1,600 What It Covers: The jewelry exemption covers all types of accessories including rings, necklaces, earrings, etc. It is important to note that is not limited to real or very expensive pieces. This exemption also applies to inexpensive costume jewelry.
Health Aids: (..can’t leave home without it? Things like that.) Amount: can exempt any amount. What It Covers: The federal bankruptcy exemption for health aid includes items where the sole purpose is to assist you in maintaining your health and quality of life. This often includes things like prosthetic or orthopedic equipment. What It Doesn’t Cover: Keep in mind that health aid equipment does not include anything that you could also use for recreational purposes. So, things like massage chairs would not be protected.
Wrongful Death Recovery (We’re sorry to hear this. Let’s be sure to protect it.) Amount: can exempt any amount. What It Covers: The federal bankruptcy exemption for “wrongful death” allows you to protect payments that you received for the death of someone you depended on such as a spouse.
Personal Injury Recovery (We’re sorry to hear this. Let’s be sure to protect it.) Amount: $23,675 What It Covers: The federal bankruptcy exemption for personal injury covers any money that you received for harm, loss of future earnings, or if you were the victim of a crime. What It Doesn’t Cover: This federal bankruptcy exemption does not include payments received for things like “pain and suffering” or if you are being compensated for financial losses due to the injury.
Lost Earning Payment (We’re sorry to hear this. Let’s be sure to protect it.) Amount: can exempt any amount. What It Covers: This federal bankruptcy exemption covers payments that you’ve received for loss of past earnings or wages. It is important to note that this is viewed separately from the personal injury exemption above.
Pensions & Retirement Accounts (Saving for later? This is for you.) Amount: Retirement accounts or spendthrift trusts? You can exempt any amount. IRA and Roth IRAs? You can exempt up to $1,283,025. What It Covers: this federal bankruptcy exemption covers:
Tools of Trade (Use anything for work?) Amount: up to $2,375 What It Covers: The federal bankruptcy exemption for tools of trade covers equipment that you need for your business or livelihood. This could include tools, factory equipment, and business vehicles. The item must be necessary to your specific trade or job in order to be exempt.
Insurance (Phew! Aren’t you glad you have it?)
Amount: You can exempt any amount. The exception to this is life insurance which has a $12, 625 maximum exemption.
What It Covers: The federal bankruptcy exemption for insurance includes different types of insurance such as: accident insurance, unmatured life insurance policy, disability benefits, illness benefits, unemployment, life insurance from someone who you were a dependent of, and life insurance.
What It Does Not Cover: This exemption does not apply to credit insurance.
Public Benefits (What helps you get from month-to-month?) Amount: Any amount. What It Covers: The federal bankruptcy exemption for public benefits covers money that you receive from government assistance such as Social Security, unemployment, veteran’s benefits, etc.
Alimony and Child Support (paying a former partner or kids?) Amount: Any amount. What It Covers: The federal bankruptcy exemption covers the amount that you recieve for alimony or child support from a former partner or spouse. What It Doesn’t Cover: Be careful not to confuse this with money that you may pay in domestic support. This only applies if you are the recipient of support not the payer.
Wildcard (the extra stuff you want to hold onto) Amount: up to $1,250 (any property) ; up to $11,850 (of unused homestead exemption) What It Covers: The wildcard exemption is one of the most powerful and useful exemptions that you have at your disposal. This exemption allows you to either: 1) protect up to $1,250 of miscellaneous items or 2) use any unused portion of the homestead exemption to protect certain items that don’t fall within any of the above categories.
The Chapter 7 bankruptcy exemptions are useful and important features of the bankruptcy process. They help you to keep property the property that means the most to you while you take the necessary steps toward getting a fresh start.
One of the most common hesitations around Chapter 7 bankruptcy is that you will not be able to keep the items you own. In actuality, the federal bankruptcy exemptions make allowances for most types of day-to-day property.
So, unless you have very large or valuable assets, it is unlikely that the court with try and take the things you own.
If you live in a state that give you the option between the state and the federal bankruptcy exemptions, it is important to consider both exemption systems. That way you can be sure to pick the one that protects more of your property.
Chapter 7 bankruptcy is a powerful poverty fighting tool. The federal bankruptcy exemptions make it so you can get a clean slate without losing the items that you love.
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Upsolve is a 501(c)(3) legal aid nonprofit that started in 2016. Our mission is to help low-income Americans in financial distress get a fresh start through Chapter 7 bankruptcy at no cost. We do this by combining the power of technology with pro bono attorneys. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have mission-driven funders that include the U.S. government, former Google CEO Eric Schmidt, and private charities.