People who are filing for bankruptcy under either Chapter 7 or Chapter 13 may be able to exempt certain critical assets from the proceedings. This means that the asset to which the exemption applies will not be taken and sold to a creditor to pay off a debt under Chapter 7, or used to calculate payments in a Chapter 13 plan. Most exemptions are specific to a certain type of property. These include the homestead exemption for your primary residence and the motor vehicle exemption for a car. However, a debtor also can use a wildcard exemption, which consists of a certain amount of value to be applied toward any property. You may be able to protect part or all of an asset’s value by using an exemption, depending on how much the exemption covers and how much the asset is worth.
Items that are not likely to be covered by exemptions include assets that are luxuries rather than necessities. For example, you might not be able to protect a second home, a sports car, jewelry, or a designer watch. If you own several of these assets, you may want to consider selling them to pay off the debt rather than filing for bankruptcy. While technically you cannot protect a pet with an exemption, you likely will not lose your pet unless it has a very high value because the trustee would not receive much money from selling it.
Chapter 7 Exemptions
Under Chapter 7, your assets are liquidated and sold by the trustee to pay your debts. If you use a Chapter 7 exemption, you can potentially prevent an asset from being liquidated. If the exemption is worth more than the value of the asset attached to it, you can simply keep the asset. If the exemption is worth less than the value of the asset, the bankruptcy trustee can take the asset to sell it and then reimburse you from the proceeds of the sale for the value of the exemption.
Chapter 13 Exemptions
Under Chapter 13, you reorganize your finances and develop a repayment plan for paying your debts, but your assets are not liquidated. Creditors to which you owe non-priority unsecured debts can be paid back in proportion to your non-exempt assets under Chapter 13. Thus, Chapter 13 exemptions can reduce your monthly payments under your repayment plan.
Filers may use the exemption system of the state where they have lived for the past two years. If they have not lived in the same state for the past two years, they can use the exemption system of the state where they lived for the majority of the time during the 180 days before the past two years. Filers who are not eligible to use any state’s exemption system may use the federal system.
While each state has its own set of exemptions, there is also a set of federal bankruptcy exemptions. You cannot use these in every state, but some states allow you to choose between the state exemptions and the federal exemptions. Debtors should be aware that they cannot take some exemptions from each set. Instead, they must choose one set of exemptions or the other in its entirety.
If you are using the state bankruptcy exemptions, you may be able to use federal nonbankruptcy exemptions to cover some of your assets. You cannot use these exemptions if you are using the federal bankruptcy exemptions. Therefore, when you are deciding whether to use the state or federal bankruptcy exemptions, you may want to consider the state exemptions together with the federal nonbankruptcy exemptions in determining which option protects more of your assets. Federal nonbankruptcy exemptions are available only to people who work in certain occupations or belong to certain groups.