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.

Updated By , Attorney

Bankruptcy exemptions are laws that allow bankruptcy debtors to protect property from creditors. Exemptions protect the same amount of property in Chapter 7 bankruptcy and Chapter 13 bankruptcy. The primary difference between the two chapters is that the bankruptcy trustee appointed to administer the case will sell nonexempt property in Chapter 7—the things the filer can't protect with an exemption—and the debtor will pay for nonexempt property in Chapter 13 through the Chapter 13 repayment plan.

The Bankruptcy Estate and the Bankruptcy Trustee

The filing of a bankruptcy case creates a bankruptcy estate consisting of the assets and liabilities the debtor had at the exact moment of the bankruptcy filing. The court appoints a bankruptcy trustee whose job is to make sure that any nonexempt value in the estate goes to the debtor's creditors.

Example. If a debtor files bankruptcy and owns $40,000 worth of property but can only exempt $30,000, the trustee must make sure that creditors receive the $10,000 difference. The trustee would sell the nonexempt property in Chapter 7 and distribute the funds to the creditors. In Chapter 13, the filer would keep the nonexempt property, but the trustee would ensure that the creditors get paid $10,000 through the repayment plan.

State Versus Federal Exemptions

Both federal and state bankruptcy exemptions exist. You'll find the federal exemptions in section 522 of the Bankruptcy Code. These exemptions allow debtors to exclude certain property from the bankruptcy estate up to a certain dollar amount in value. In other words, filers keep exempt property.

Example. The Bankruptcy Code allows debtors to exempt up to $4,000 of value in one motor vehicle (as of April 1, 2019). (11 U.S.C. § 522(d)(2).) If a debtor owns a car with $5,000 in equity, $4,000 of that equity is protected. The remaining $1,000 is nonexempt, meaning it becomes part of the bankruptcy estate.

States also have exemption lists. Federal bankruptcy law allows debtors to use state exemptions instead of federal exemptions. But ultimately, states decide whether a filer must use the state exemptions exclusively, or whether the filer can choose to use one list or the other (but debtors can't mix and match between the two).

Currently, sixteen states allow debtors to choose between state and federal exemption schemes. The remaining states require debtors to use the state exemptions. California is unique in that it allows debtors to choose from two different state exemption lists. Debtors using state exemptions may also use a list of exemptions called the federal nonbankruptcy exemptions.

Which State Exemption System Can You 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) have different time requirements, too. 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 refers to being able to take twice the amount of an exemption available to you when you file a joint case with your spouse. Doubling allows you to keep more of your property in Chapter 7 and pay less to unsecured creditors through a Chapter 13 plan. When doubling is available, you and your spouse can each take the full exemption amount on the same piece of property as long as you each have an ownership interest in the asset.

Example. Alan and Grace are married. They file a joint bankruptcy case in a jurisdiction that allows doubling exemptions. They own one car titled in both their names, as well as a house deeded in both their names. They also have a boat, which is in Alan's name only, and various household furnishings. Their state's exemptions law 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 their exemptions on the car, the house, and the furnishings, bringing their exemption amounts to $8,000, $200,000, and $6,000, respectively. However, only Alan can exempt $1,000 of equity in the boat.

Doubling Federal and State Exemptions

The federal exemptions allow spouses to double exemptions on joint property. However, whether you can double exemptions under state law depends on the state.

Example. Ted and Mary live in Michigan. Michigan allows bankruptcy filers to choose whether to use the federal exemptions or the state exemptions. Ted and Mary 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. John and Leanne live in Louisiana and file bankruptcy. Louisiana has opted out of the federal exemptions, so John and Leanne must use Louisiana state law to exempt their property. They own their house together (they are both on the deed); however, Louisiana law states that spouses may not double their exemptions for their homestead. The Louisiana homestead exemption at the time they file their case is $35,000, and they cannot exempt more than that of their home equity.

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 file a joint bankruptcy case and choose the federal exemptions. They own a car worth $6,000 that Jill drives, but only Bob is on the title. Because Jill does not have a legal ownership interest in the vehicle, only Bob can use the federal motor vehicle exemption.

Exemptions in Chapter 7: Protecting Your Property

Chapter 7 bankruptcy is a liquidation bankruptcy. A Chapter 7 trustee must liquidate 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 their money and property.

If the debtor is not able to exempt all his property, the debtor can either pay the trustee the nonexempt value of the property or allow the trustee to sell the property. Once the trustee has the funds from liquidating the property, he or she will distribute the money to unsecured creditors in the manner the Bankruptcy Code requires.

Example. If a debtor's car is worth $5,000 and the debtor exempts $4,000 of that value, the debtor can either pay the trustee $1,000 to keep the vehicle, or the trustee can sell the car and pay the debtor $4,000 while distributing $1,000 minus sales costs to unsecured creditors.

Find out more about how Chapter 7 bankruptcy works in Chapter 7 Bankruptcy.

Exemptions in Chapter 13: Reducing Your Payment

Chapter 13 bankruptcy works differently than Chapter 7. In a Chapter 13 case, the debtor proposes a three- to five-year repayment plan where the debtor pays back some or all of debts. 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 that would have been sold in a Chapter 7 case. In most instances, the more nonexempt property the debtor has, the higher the Chapter 13 plan payment will be, so exemptions help reduce the amount the debtor must pay into the Chapter 13 plan.

Example. If a debtor has $1,550 of nonexempt equity in a car, 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.

You can learn more about Chapter 13 and how the repayment plan works by reading about Chapter 13 Bankruptcy and Chapter 13 Payment Plans.

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