Exemptions In Bankruptcy

Bankruptcy exemptions and the stuff you get to keep

Each individual who files bankruptcy gets to keep basic assets deemed necessary for the debtor’s “fresh start” after bankruptcy.

That property is the debtor’s “exempt property”.

The debtor claims property as exempt in the schedules that are filed to initiate the case.  If no objections are filed to those claims, they become final 30 days after the meeting of creditors. Exempt property is then no longer property of the bankruptcy estate.

When everything is exempt

Most Chapter 7 cases are no-asset cases:  that is, the debtors give up nothing to the trustee for the following reasons:

First, the exemption systems permit debtors to retain the means of day- to- day living, free from the claims of their creditors.  The point of bankruptcy is to get a fresh start and that is only possible if the debtor has something to start with.

Second, used household goods and personal effects have little resale value, and so do not represent a real source of value to repay creditors.

Pension rights and 401(k) plans, frequently the largest or second largest asset of most families, are not property of the estate.  Since retirement plans are outside the estate, the debtor doesn’t have to exempt them to keep them.

IRA’s and other retirement savings may be property of the estate but are frequently exempt.  See Property of the estate and Retirement savings in bankruptcy.

The 2005 amendments to the Bankruptcy Code increased the exemption for IRA’s for all debtors, regardless of state of residence, to $1 million plus cost of living adjustments.

Exemptions in Chapter 13

How much can I exempt?

Exemptions are the one place where bankruptcy law varies from state to state.  Congress created a set of exemptions in the bankruptcy code but allowed each state to opt-out of those provisions in favor of  state law.

Sixteen states allow debtors to elect the bankruptcy code exemptions.  In those states, debtors get their choice between the federal law and those in the law of their state.  For the balance of the states, only the state exemptions can be selected.  You need to consult state law for the list of exemptions available to you.

Which exemptions apply?

The 2005 bankruptcy changes have altered the rules about which exemptions apply.

  • You must have lived for two years in the state in which you are filing bankruptcy to use the exemptions of that state.
  • If you haven’t lived there for 2 years, then the exemptions of the state in which you lived in the six months beyond the two year look back period apply.
  • If no state’s exemptions are available, you are entitled to use the federal exemptions.

How do I calculate what’s exempt?

The values in the statutes refer to the present sale value of the item (not its purchase price or its replacement value).

If an asset is subject to a mortgage or a lien, it is the value of the item after deducting the amount of the lien or liens (the equity) that is used to figure the exemption.  Some liens can be avoided to create exempt equity.  Explore lien avoidance.

The law looks only to the value of the debtor’s share of the equity in an item that is co owned.

Image courtesy of Theo B.

About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.