Bankruptcy Exemptions: Your Property in Bankruptcy

A primer on bankruptcy exemptions and how they protect your property and assets in Chapter 7 and Chapter 13 bankruptcy.

By , Attorney · University of the Pacific McGeorge School of Law

Bankruptcy exemption laws allow bankruptcy debtors to protect property from creditors. Although filers use the same exemptions in Chapter 7 and Chapter 13 bankruptcy, what will happen to "nonexempt" property the filer can't protect will depend on the bankruptcy chapter filed.

In Chapter 7, the bankruptcy trustee responsible for administering the case sells nonexempt property and distributes the proceeds to creditors. However, a Chapter 13 filer pays to keep nonexempt property through the Chapter 13 repayment plan.

The Bankruptcy Estate and the Bankruptcy Trustee

When you file for bankruptcy, you lose your ownership interest in your property, and your assets go into a bankruptcy estate managed by the bankruptcy trustee.

Protecting Property Using Bankruptcy Exemptions

You don't lose all of your property when you file for bankruptcy. Bankruptcy exemptions allow debtors to exclude some property from the bankruptcy estate. In other words, filers keep exempt property.

Some exemptions let you keep specific items regardless of value, such as all prescribed medical devices, clothing, and household items. Other exemptions limit property value up to a certain dollar amount. For instance, the exemptions available to you might allow you to keep $75,000 in home equity and a car worth up to $6,000.

Using Bankruptcy Exemptions in Chapters 7 and 13

Your creditors receive the same amount in Chapters 7 and 13, even though Chapter 13 filers keep everything they own. The example below illustrates how this works, and a detailed explanation follows.

Example. Suppose a debtor owns $40,000 worth of property but can only exempt $30,000. In that case, the bankruptcy trustee must ensure creditors receive $10,000. The Chapter 7 trustee would sell enough nonexempt property to distribute $10,000 to creditors. The Chapter 13 trustee would collect $10,000 from the filer through the repayment plan and distribute the funds to creditors.

Exemptions in Chapter 7: Protecting Your Property

Chapter 7 filers lose nonexempt property that they can't protect with a bankruptcy exemption. If you own nonexempt property, the trustee will sell it and pay creditors from the proceeds. Here's why.

Chapter 7 bankruptcy is a liquidation bankruptcy, and a Chapter 7 trustee must "liquidate" or sell the debtor's nonexempt assets and use the money to repay creditors. Most Chapter 7 cases are no-asset cases because most debtors can use exemptions to protect all property.

The trustee will sell the nonexempt property if the debtor can't exempt all property. The trustee deducts sales costs and the trustee's fee before distributing the remaining funds to unsecured creditors according to the debt payment priority outlined in the bankruptcy code.

Sometimes the trustee will let the debtor pay to keep nonexempt property. The debtor must use exempt or nonbankruptcy funds, such as money earned after the bankruptcy filing date or funds from a friend or family member.

Example. Suppose a debtor exempts $4,000 of car equity from a car worth $9,000. The trustee will sell the car, pay the debtor the $4,000 exemption amount, and distribute $5,000 minus sales costs and the trustee's fee to unsecured creditors. Many trustees will allow the debtor to repurchase the vehicle by paying the trustee $5,000 minus fees and costs, the amount creditors would have received otherwise.

Exemptions in Chapter 13: Reducing Your Payment

Chapter 13 bankruptcy works differently than Chapter 7 because the Chapter 13 trustee doesn't sell property. Instead, you'll pay creditors the value of your nonexempt property minus sales costs and fees through a three- to five-year Chapter 13 payment plan. The Chapter 13 trustee distributes the funds to creditors.

Creditors in a Chapter 13 case must receive at least what they would have received if the debtor had filed Chapter 7. So the debtor must pay unsecured creditors an amount equal to the value of the nonexempt assets—those things the trustee would have sold in a Chapter 7 case.

Example. Suppose a debtor has $1,550 of nonexempt vehicle equity. In that case, the debtor must pay enough into the Chapter 13 plan to provide $1,550 to unsecured creditors over the life of the Chapter 13 plan.

Do I Use State or Federal Bankruptcy Exemptions?

Both state and federal bankruptcy exemption sets exist. You'll find the federal exemptions in section 522 of the Bankruptcy Code and the state exemptions in your state statutes.

Ultimately, your state decides whether you're limited to the state exemptions. Sixteen states let filers use the federal exemptions instead of the state set, and California allows debtors to choose from two different state exemption lists.

If you can choose the system you'd like to use, you must use it exclusively. You can't mix exemptions from both sets. Debtors using state exemptions can also use federal nonbankruptcy exemptions.

Which State Exemption System Can I Use?

The state exemption system you'll use will depend on where you've lived for the last few years. Homestead exemptions (exemptions protecting the equity in the home you live in) also different time requirements. Learn more about homestead exemptions and find state exemption lists in Nolo's Bankruptcy Exemptions by State article.

Spouses Can Double Some Bankruptcy Exemptions

Doubling in bankruptcy lets you take twice the exemption amount when filing a joint case with your spouse. The federal exemptions allow spouses to double exemptions on jointly owned property. However, whether you can double exemptions under state law depends on the state.

When doubling is available, you and your spouse can each take the total exemption amount as long as you both have an ownership interest in the asset.

Example 1. Alan and Grace own a car, house, and various household furnishings together and file bankruptcy in a state that allows exemption doubling. They also have a boat in Alan's name only. Their state's exemption laws allow up to $4,000 for car equity, $100,000 for home equity, $3,000 for home furnishings, and $1,000 for boats. Alan and Grace can double the car, the house, and the furnishing exemptions, increasing the exemption protection to $8,000, $200,000, and $6,000, respectively. However, only Alan can exempt $1,000 of boat equity.

Example 2. Ted and Mary live in Michigan and can use federal or state exemptions. They choose the federal exemptions because they have a tax refund they want to protect, and Michigan law does not provide an exemption to protect it. Ted and Mary can double their exemptions on any property they own jointly, including their joint tax refund.

Example 3. John and Leanne live in Louisiana and must exempt their property using Louisiana's state exemptions. Although they own their house together, spouses can't double Louisiana's homestead exemption.

When You Can and Can't Double Exemptions

You can double your bankruptcy exemptions with your spouse if all of the following are true:

  • You file a joint bankruptcy case.
  • State law allows you to double, or you choose federal exemptions.
  • You own the property jointly.

You can't double your bankruptcy exemptions with your spouse if one or both of the following is true:

  • You're using state law exemptions, and the state law says you cannot double for that property.
  • You don't own the property jointly.

Example. Bob and Jill filed a joint bankruptcy case and used the federal exemptions. They own a car worth $6,000 that Jill drives, but only Bob is on the title. Because Jill doesn't have a legal ownership interest in the vehicle, they can't double the federal motor vehicle exemption.

What's the Deadline for Filing an Objection to Exemptions?

Exemptions reduce the amount of money creditors receive in bankruptcy. Sometimes, the creditor or trustee might not agree that a debtor is entitled to exempt a particular asset. In most cases, the dispute resolves informally. Otherwise, the bankruptcy judge will decide the matter.

To bring the issue before the judge, the person objecting must file and serve the objection within thirty days of the following:

  • the trustee concludes the 341 meeting of creditors, the one hearing all filers must attend, or
  • the debtor "amends" or changes the exemption list.

The clerk will schedule a hearing before a bankruptcy judge, and the debtor can file a written response. A court can extend the time to file an objection "for cause" or a good reason, and while there are several exceptions to the 30-day deadline, they don't apply to most debtors.

Common Exemption Challenges

The trustee or creditor must prove that a particular exemption is improper at the hearing. The most common challenges to a debtor's exemptions include:

  • the exemption law doesn't cover the type of property the debtor wants to protect, or
  • the property is worth more than the amount listed in the petition.

At the hearing, the debtor will want to show that the exemption is appropriate and the property's value is accurate.

It's common to present appraisals or expert testimony to prove the property's value. The proper valuation date is the petition filing date. Any increase in value after the petition date won't be part of the bankruptcy estate.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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