Exempt vs. Non-Exempt Property Under Chapter 7 Bankruptcy

Chapter 7 bankruptcy is sometimes called "liquidation bankruptcy." This is because it involves selling the filer's property and assets to pay off as much debt as possible before discharging (eliminating) the remaining debt. But, bankruptcy law protects some kinds of property from being sold off to pay these debts.

These protections are called exemptions. Some exemptions protect entire types of property, while other exemptions may have limits on the value they protect, like a home. A filer's tax filing may also affect exemptions.

A person filing for bankruptcy protection can expect to turn over a sizeable portion of their property to a so-called bankruptcy estate. A bankruptcy trustee manages this estate, selling the property to raise money to pay off a debtor's creditors.

People filing for bankruptcy want protection from their creditors on the collection of their debts. The U.S. Constitution gives the federal government power over bankruptcy. The federal government has established U.S. Bankruptcy Courts and the Bankruptcy Code to handle bankruptcy proceedings nationwide.

Bankruptcy filers, whether businesses or individuals, are often justifiably concerned about what property they will be allowed to keep, what they must give up, and whether they will face foreclosure. But a bankruptcy debtor doesn't necessarily have to turn over everything to the bankruptcy estate because of the exemption system.

Read on to learn more about the differences between exempt and non-exempt property.

How Bankruptcy Exemptions Work

Bankruptcy law allows debtors to keep a certain amount of property after bankruptcy proceedings. This is called "exempt" property — it's excluded from the bankruptcy estate.

Property that can't be exempted is called "non-exempt" property. Generally, a bankruptcy debtor can exempt a certain amount of their property during bankruptcy. If done correctly, this can save most of the property of someone going through bankruptcy.

Exempt property generally includes the "necessities of modern life." This typically includes the sort of items necessary for living and working. Bankruptcy law is concerned about getting debtors out of crushing debt and putting them back on their feet, with certain debts deemed very important remaining after bankruptcy. Taking everything is counterproductive, and bankruptcy law recognizes this fact. Non-exempt property generally covers items outside the necessities for living and working.

Court rulings and general practice experience have established a general idea of what types of property are exempt and non-exempt. Below are examples of property that a Chapter 7 bankruptcy debtor will usually have to give up and property that the debtor may usually keep.

Non-Exempt Property

Non-exempt assets that a liquidation debtor usually has to give up include:

• Expensive musical instruments, unless the debtor is a professional musician
• Collections of stamps, coins, and other valuable items
• Family heirlooms
• Cash, bank accounts, stocks, bonds, and other investments
• A second car or truck
• A second home or vacation home

Exempt Property

Personal property that a debtor may usually keep includes:

• Motor vehicles, up to a specific value
• Reasonably necessary clothing
• Reasonably necessary household goods, appliances, furnishings
• Alimony and child support
• Retirement accounts
• Life insurance policy
• Jewelry, up to a particular value
• Pensions
• A portion of the equity in the debtor's home
• Tools of the debtor's trade or profession, up to a specific value
• Public benefits, including public assistance (welfare), social security, and unemployment compensation, accumulated in a bank account
• Damages awarded for personal injury

Types of Bankruptcy Exemptions

State laws, and sometimes federal law, establish what bankruptcy exemptions are available to a filer. Each state has its own set of exemptions that may either co-exist with federal exemptions or replace them. 

Some states allow you to choose between federal exemptions and state exemptions. Here are a few exemptions that vary depending on your state:

• Homestead Exemption: This exemption protects your home if dealing with a Chapter 7 Bankruptcy. If you're dealing with a Chapter 13 bankruptcy, this exemption helps reduce your payments.
• Wildcard Exemption: In states where this exemption is permitted, the wildcard exemption can be applied to any person's assets. For federal bankruptcy, this exemption is $1,475 plus any unused homestead exemptions up to $13,950. States with wildcard exemptions vary.
• Motor Vehicle Exemption: This exemption allows you to keep your car or some of its equity. Equity is the difference between the amount you owe on your motor vehicle and its fair market value. The amount of equity you can keep depends on this calculation. Each state has its own rules regarding the motor vehicle exemption.
• Personal Property Exemption: Several exemptions exist for different types of personal property. Some examples include clothing, jewelry, home furnishings, and appliances. Per item limits and a total limit may apply to these exemptions.

If you need help deciding whether to follow federal law or state law, contact an experienced bankruptcy attorney for legal advice.

Thinking of Filing Bankruptcy for Debt Relief? An Attorney Can Help

Figuring out what laws and exemptions apply to different types of property is complicated. A bankruptcy attorney can help you navigate this process. An experienced attorney will review your situation, go over your options, and help with complex bankruptcy forms. 

 Contact a local bankruptcy attorney to explore your options and prepare for a fresh start.