What Are the Federal Nonbankruptcy Exemptions?

The federal nonbankruptcy exemptions are federal exemption laws that exist outside of the Bankruptcy Code and protect property from creditors even if no bankruptcy case has been filed. By contrast, federal bankruptcy exemptions are listed in the Bankruptcy Code and provide protection only in a bankruptcy proceeding. This article will explore how federal nonbankruptcy exemptions can protect your rights in a bankruptcy case and conclude with a brief overview of some of the most commonly used federal nonbankruptcy exemptions. 

How do federal nonbankruptcy exemptions help protect my property in a Chapter 7 bankruptcy? 

When you file for Chapter 7 bankruptcy, part of the process calls for you to turn over property (called assets) to be sold and used toward paying your unsecured debts. The Bankruptcy Code allows for some protection of your property called exemptions. Exemptions are the laws that designate what property you can keep during and after your bankruptcy so that you can truly get a fresh start.

Every state has its own set of exemptions that are available when you file for bankruptcy. Many states limit filers to only use the state exemptions when they file for Chapter 7 bankruptcy. Whenever you use state exemptions you can also use the federal nonbankruptcy exemptions (if you qualify for any) as a supplement to your state exemptions.  Some states, however, allow people to elect the federal bankruptcy exemptions if they prefer. If you have the choice, you can pick whichever set of exemptions gives you the most protection. This can be determined by your personal financial circumstances and priorities. 

Who can use federal nonbankruptcy exemptions? 

If you are using state exemptions you can use the federal nonbankruptcy exemptions as a supplement for additional protection of your property, assuming you qualify for them. If however, you elected the federal bankruptcy exemptions, you can’t take advantage of the federal nonbankruptcy exemptions. This is something to consider as part of your decision between state and federal bankruptcy exemptions if you’re in one of the states that allow for choice.

Federal nonbankruptcy exemptions work much like bankruptcy exemptions as a protection for your property, but they can be harder to qualify for because you need to have a particular government occupation or be a member of a very specific group to do so. If you do qualify, these additional protections can be significant, as most of the federal nonbankruptcy exemptions are not limited by a specific dollar amount.

Common federal nonbankruptcy exemptions

Your retirement benefits are fully protected if you are a civil, foreign, or military service employee, a railroad worker, a CIA employee, a veteran, a Military Medal of Honor Roll recipient, or a Social Security benefit recipient.

You can also fully protect your death and disability benefits if you are a longshoreman, harbor worker, or government employee. Additionally, any benefits received for risk, hazard, injury, or death resulting from war is also fully exempt.

Survivor’s benefits are fully exempt for lighthouse workers, anyone in military service and the following judicial employees: judges, center directors, and Supreme Court Chief Justice administrative assistants. 

Beyond the exemptions listed above, there are also additional miscellaneous federal nonbankruptcy exemptions. These include the following:

• Military group life insurance

• Deposits to savings accounts by military while on permanent duty outside the U.S.

• 75% of earned but unpaid wages or 30 times the federal minimum hourly wage, whichever is greater. (Judges have the discretion to grant more, usually for low-income debtors)

• Indian lands and homestead sale or lease proceeds.

• Klamath Indian benefits for Indians living in Oregon.

• Railroad worker unemployment benefits.

• Seamen’s clothing.

• Debts incurred by a seaman while on a voyage.

• Wages of a seaman except if used for spousal or child support.

Conclusion

The federal nonbankruptcy exemptions can add a significant amount of protection for your property in a Chapter 7 bankruptcy. If you met the qualifications for any of these supplemental protections, you should take that into account as an important factor if given the opportunity to choose between state and federal exemptions.