What Are Non-Exempt and Exempt Assets in Chapter 7 Bankruptcy?

In a Chapter 7 bankruptcy (liquidation bankruptcy), a bankruptcy trustee will take control of the filer’s assets to pay off their creditors. Bankruptcy law protects some of a debtor’s property from sale. These exemptions ensure that a debtor has some property left after a bankruptcy discharge.

Bankruptcy gives debtors debt relief and a chance at a fresh start. The U.S. Bankruptcy Courts and the Bankruptcy Code give debtors protection from creditors by exempting some property from the bankruptcy process. Exemptions can protect your home, your household possessions, and other essential property. This article describes exempt and non-exempt assets when you file for bankruptcy.

How Bankruptcy Exemptions Work

When you file a bankruptcy petition, you must list all your personal property and assets. A bankruptcy trustee takes over this property (the bankruptcy estate) and sells all non-exempt property to pay your creditors. The court discharges any remaining debt.

Exempt property is all property excluded from the bankruptcy estate. This may include your primary residence, necessities such as clothing and household items, and a car or other transportation. Non-exempt property includes luxury items like second homes, boats, or valuable artwork.

Federal and State Exemptions

The Federal Bankruptcy Code contains a list of standard Chapter 7 exemptions. Some states have their own list of exemptions. For example, California has two lists (known as System 1 and System 2). Depending on the state, bankruptcy filers may choose between federal bankruptcy exemptions and state exemptions. State law may limit them to the state’s system only. A bankruptcy lawyer can explain your state’s exemption policy and how it applies in your case.

Types of Bankruptcy Exemptions

Both state and federal exemptions include these types of property. The homestead exemption is set by your state based on property values. Your attorney can determine what you may exempt on your petition.

• Homestead Exemption: This protects your home equity up to the state or federal limit. The exemption also protects the sale amount if you recently sold your home and will use the money to purchase a new residence. A homestead exemption only applies to your primary residence, which can be a house, condo, or mobile home.
• Motor Vehicle Exemption: The exemption protects your equity in the motor vehicle, which is the difference between the vehicle’s fair market value and what you still owe. Some states with wildcard exemptions will let you combine the two exemptions to protect more of your equity.
• Personal Property Exemption: Exemptions for different types of personal property up to a certain dollar value. This may be a per-item limit, such as for artwork or fine jewelry, or a total limit for items like housewares.
• Wildcard Exemption: The wildcard exemption may apply to any assets. Not every state offers this option.

If a debtor’s assets exceed the exemption limits or fall outside the exemption list, the trustee can sell them to pay off your creditors. If you have the option between federal law or state law and are not sure which you should use, contact an experienced bankruptcy attorney for legal advice.

Keeping Property in a Chapter 7

In any bankruptcy case, debtors may fear losing their home, their car, and all their assets. In most cases, you will not lose everything. Working with a bankruptcy attorney can help you keep most of your assets.

Before you file a Chapter 7, you must pass a means test. If your income is below your state’s median annual income, you qualify to file a Chapter 7. If not, the court makes a determination based on your income and your essential living expenses. The trustee reviews your bankruptcy filing and makes a decision about your assets.

“No Asset” Bankruptcies

An estimated 60-70% of all Chapter 7 bankruptcies are “no-asset” bankruptcies. Either all your assets are exempt for various reasons, or what you have is not valuable enough to sell to pay off your creditors. In a no-asset case, the trustee files a report with the bankruptcy court, and the case closes within three to four months.

If you do not own your own home, have mostly paid off your car loan, and do not have valuable art or collections, you will probably keep most or all of your property. For example, you may have outstanding unsecured credit card debt of $150,000 and medical bills of $500,000. If your total assets have a fair market value of $25,000, the trustee cannot pay off your creditors. The court will discharge your debts and close your case.

Complicated Bankruptcies

Your bankruptcy may get more complicated if you have valuable assets or you own your home and are trying to avoid foreclosure. A Chapter 7 is still possible, but you’ll need legal advice to keep more of your assets. Items that are non-exempt can include:

• Items with an appraised value, like artwork, coin or stamp collections, or family heirlooms: Beanie Baby or Hummel collections with sentimental value are probably exempt, but a vase from the Ming Dynasty won’t be
• Second homes, boats, or cars: They may be considered exempt if they have no market value
• Stocks, bonds, and other investments: There are exceptions, such as retirement accounts and pensions
• Musical instruments may not be exempt unless they fall under the “tools of the trade” exemption: A musician can keep their 1953 Stratocaster, but a collector cannot

A Chapter 7 may become complicated if you acquired a large sum of money just before or immediately after filing. A late tax refund or real estate closing can complicate your Chapter 7, even if you still have more debts than you can reasonably repay.

Although partnerships and LLCs can file for Chapter 7 bankruptcy, the process is more complicated when business owners are involved. In these cases, you should consider legal assistance to protect yourself and your property.

Frequently Asked Questions

These are some of the most common questions that arise when filing a Chapter 7 bankruptcy.

Will I lose my house?

When trying to avoid foreclosure, there’s a decent chance you may be able to keep your primary residence. The purpose of a Chapter 7 is to clear your unsecured debt, such as credit card bills, that are keeping you from staying current on your mortgage. Important factors include:

• Your amount of home equity
• The home equity exemption in your state
• Whether you can make your mortgage payments once your other debts are discharged

Second houses, such as vacation homes, will likely be liquidated to pay your debts.

Will I lose my car?

You can probably keep one car. Most state and federal exemptions provide for one vehicle. Cars modified for disabled drivers are always exempt. The exemption protects your equity in the vehicle, so if you have mostly paid off your car, you can usually keep it.

Will I lose everything else?

If the trustee cannot sell it for a reasonable price, they won’t take it. You can usually keep:

• Clothing
• Household goods, appliances, and furnishings
• Jewelry below the exemption amount
• Books, posters, artwork
• Electronics
• “Tools of the trade,” such as power tools for those who make a living using them
• Retirement accounts and life insurance policies
• Public benefits, social security, and disability payments
• Alimony, spousal support, child support

Cash wages deposited into your bank account are not exempt unless your state has a wildcard exemption or another state law.

In a Chapter 7, the trustee is mostly concerned with paying off your creditors. If selling your property will not give them enough money to give your creditors a substantial payment, they likely won’t do so.

When You Need a Bankruptcy Attorney

Every bankruptcy is different. The federal Bankruptcy Code provides a framework, but determining whether an asset is exempt or non-exempt requires understanding how the laws apply to your situation. Having an attorney review your filing and explain what laws apply to your case can help you protect more of your property.

You should discuss your filing with your attorney when:

• Your home equity is at or above the exemption limit, but you do not have the income to pay your creditors
• You need to choose between federal and state exemptions
• You are a married couple needing to choose between filing jointly or individually
• You recently acquired or sold property or transferred large sums of money
• There are business assets involved that may not meet the “tools of the trade” exemption

Moving to a new state can also make it a very good idea to get an attorney. Most states have residency requirements as to when you can take advantage of their bankruptcy exemption laws. In some cases, you can file bankruptcy in a given state after living there for as few as 180 days, but you can’t claim exemptions unless you’ve lived there for more than two years. In those cases, your exemptions are based on your previous state of residence.

Retirement accounts, inheritances, and IRAs have their own set of rules. An inherited IRA is not protected like a regular retirement account, but some inheritance funds may be. If you transferred money into or out of your retirement fund before you filed bankruptcy, you could face objections from the trustee unless you have an attorney to help you explain the transfer.

Chapter 13 Bankruptcy: Another Alternative

A Chapter 13 bankruptcy, also called a reorganization bankruptcy, allows debtors to work with a trustee to develop a repayment plan without losing their personal assets. To file a Chapter 13, you must have a stable income that allows you to make repayments over a three- to five-year period.

Chapter 13 bankruptcy may be a better option when your income is higher than your state’s median, the majority of your debt consists of secured debt that cannot be discharged by a Chapter 7, or if you want to keep most of your assets.

Bankruptcy is a serious step that will affect your credit rating for years. Consider speaking with a bankruptcy attorney before filing.

Get Legal Advice From a Local Bankruptcy Attorney

If you need help determining what exemptions apply to your assets or want to protect as much property as possible, contact an experienced bankruptcy attorney for legal advice. An experienced attorney will review your specific situation, go over your options, and help you prepare for a fresh financial start. Given how complex a filing can be and how it will affect your finances, speaking with an expert is often the best move.