A central idea of bankruptcy law is that you can get a fresh start financially. Part of this idea is that you should not be left totally destitute—you should be able to start over with a minimal amount of essential property to allow you to survive and get on your feet again. So, if you file for bankruptcy, you will be able to keep certain items of property, called exempt property. Exactly what property is exempt will depend upon your circumstances and the state in which you reside.
Why Exemptions Are Important
For most individuals, there are two types of bankruptcy.
Chapter 7 Bankruptcy. In a Chapter 7 bankruptcy, exemptions can be very important. All of your nonexempt property must be turned over to the court-appointed trustee, who may sell the property and use it to pay your creditors. The more Chapter 7 bankruptcy exempt property you can claim, the more property you will keep.
Chapter 13 Bankruptcy. In a bankruptcy under Chapter 13 of the Bankruptcy Code, you may file bankruptcy and keep your property; however, the value of your nonexempt property is added to your income to determine the amount you must pay to your creditors. The more property you can claim as exempt, the less money you will be required to pay monthly to your creditors.
Which Exemptions to Use
Which exemptions you may use depends upon your state. You will file for bankruptcy in the state where you are domiciled. Your domicile state is your primary place of residence. You may be a part-time resident of more than one state, but you may only have one domicile state. This is typically the state where you have your driver’s license, where your car is registered, where you are registered to vote, and from where you file your tax return.
If you have been continuously domiciled in a state for 730 days before filing for bankruptcy, you must use the exemptions allowed by that state. If you have not been domiciled in a state for at least 730 days, you will use the exemptions allowed by the state where you were domiciled for the longest period of time during the 180 days before filing.
The Exemption System
The exemption system is a bit complicated. Although the Bankruptcy Code is a federal law, it allows a person filing for bankruptcy to take advantage of state laws regarding property that is exempt from creditors’ claims. For people in certain states, the Bankruptcy Code also provides for its own exemptions, but you will need to choose between the federal bankruptcy exemptions and state bankruptcy exemptions. However, in any state, if you choose your state’s bankruptcy exemptions, the Bankruptcy Code also allows you to use what are called nonbankruptcy exemptions.
Some exemptions are of an unlimited amount, and some have maximum values attached to them. If the value of the asset exceeds the allowed exemption amount, the asset may still be sold by the trustee in a Chapter 7 case, but you will be paid the amount of the exemption. For example, if the bankruptcy car exemption in your state is $1,500 and your car is worth, $3,000, the car could be sold, but you would get $1,500 from the sale. In many instances, the amount of an exemption may be doubled for a married couple filing a joint petition.
Federal Bankruptcy Exemptions
Currently, the federal bankruptcy exemptions only apply if you live in one of the following states: Alaska, Arkansas, Connecticut, the District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington and Wisconsin. If you live in one of these states, you will need to compare the federal bankruptcy exemptions to your state’s bankruptcy exemptions, and decide which would allow you to keep more of the property you have.
Federal Nonbankruptcy Exemptions
The federal nonbankruptcy exemptions mostly relate to benefits for various types of federal government employees. Regardless of the state in which you reside, you may use the federal nonbankruptcy exemptions in addition to your state’s exemptions. You may not use these exemptions if you live in a state listed above under “Federal Bankruptcy Exemptions” and you have chosen to use the federal bankruptcy exemptions instead of your state’s exemptions.
Bankruptcy Exemptions by State
Each state has established its own list of assets that may not be taken by creditors. Many of these state exemption laws were created before the twentieth century, so they often seem strange today. Although the details and amounts vary from state to state, generally, these exemptions may be divided into several categories, including:
1. Real Estate. This generally relates to what is considered your homestead—the place where you live. The idea of this exemption is that you should not be left homeless after the bankruptcy. All states except for New Jersey have some form of homestead exemption (but if you live in New Jersey you could use the federal bankruptcy homestead exemption of $15,000). The amount of homestead exemption you may claim varies from state to state, from $3,500 in Michigan, to an unlimited amount in various other states. Some states limit the amount of land, and some include the value of a mobile home. Residency time limits may also apply. Finally, the federal bankruptcy law limits the state homestead exemption to $125,000 if you have not lived in the state for at least 40 months (this law only applies if you live in a state with a homestead exemption in excess of $125,000: Arkansas, California, the District of Columbia, Florida, Iowa, Kansas, Louisiana, Massachusetts, Minnesota, Nevada, Oklahoma, Rhode Island, South Dakota or Texas). However, if you wish to keep your home, you will need to maintain any mortgage payments, or reach some type of payment agreement with the lender. In some states, you are required to file some type of document with a government agency (often the county clerk or property tax assessor) in order to claim a homestead exemption.
2. Personal Property. A few states simply mention “personal property,” but most list specific types of property. These most often include motor vehicles, food, clothing, jewelry (especially wedding and engagement rings), and household goods; often up to a certain value. Harkening back to the 18th and 19th centuries, you may also see exemptions for such things as food, musical instruments, books, family portraits, sewing machines, firearms, a church pew, burial plots, a bible, pets, crops and farm animals, farm equipment, home heating fuel and military uniforms.
3. Wages. State laws generally limit the percentage or amount of wages that are subject to garnishment by creditors. Generally, about 75% to 80% of wages are untouchable by creditors.
4. Pensions. Generally, you may keep pension benefits that are covered under the federal Employee Retirement Income Security Act (ERISA), and funds in an IRA.
5. Public Benefits. This typically includes things like workers’ compensation, unemployment compensation, crime victim’s compensation, veterans’ benefits, and all kinds of welfare benefits.
6. Tools of Trade. This category includes all kinds of things necessary for a person to carry on his or her trade, such as tools, books, uniforms, office furniture, farm machinery, motor vehicles, and boats (if you are a professional fisherman).
7. Insurance. This typically includes life insurance, medical insurance, annuity contracts, disability insurance and “fraternal benefit society benefits.”
8. “Wildcard” Exemption. In addition to specific types of property, some states allow you to declare a certain dollar amount of any asset as exempt. This is commonly called a wildcard exemption and is typically not a huge amount.
Other common exemptions are alimony and child support, business partnership property and liquor licenses.
Your exempt property will be listed on the Schedule C – Property Claimed as Exempt bankruptcy form, which is filed with the bankruptcy petition. The trustee, or creditors, may file an objection within 30 days of the creditors meeting. If no objection is filed, you may keep the property.
Whether you file under Chapter 7 or Chapter 13, understanding exempt property is one of the most important aspects of your case. It can make a big difference in starting over financially.
Find out more about bankruptcy and exemptions, and if bankruptcy is an option for you with a free bankruptcy evaluation from a participating law firm.