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Chapter 7 Bankruptcy Exemptions

Key Takeaways:

  • Exempt property and assets won't be sold off as part of a Chapter 7 bankruptcy liquidation.
  • The homestead exemption can let you keep a certain amount of value in your home.
  • Different states have different bankruptcy exemptions that may be greater than federal exemptions.

Chapter 7 bankruptcy is liquidation bankruptcy. This means the bankruptcy trustee will take control of your assets and sell them off to give the money to your creditors. However, this doesn’t mean you’ll be left out on the street with nothing. There are federal and state exemptions that allow you to keep certain property after bankruptcy.

Bankruptcy exemptions vary a lot by state law. If you want to know what types of property you can keep and what you must sell in bankruptcy, talk to a bankruptcy attorney in your area about how Chapter 7 exemptions work in your state.

What Are Chapter 7 Bankruptcy Exemptions?

U.S. bankruptcy law defines Chapter 7 bankruptcy as the process of selling off assets and using that money to pay off as much of the debt as possible. This is known as liquidation, and it’s an important distinction from other types of bankruptcy that allow for reorganization plans, like Chapter 13 bankruptcy.

After Chapter 7 bankruptcy concludes, the debt is settled, and nothing more is required from you, the debtor. However, not all property is subject to liquidation. The law recognizes that it would be hard to start over from scratch after bankruptcy. You’ll need something to live on while going through the bankruptcy process.

Needs of Daily Living

On the whole, bankruptcy is not to punish you for getting into debt, but to allow you to start over. The general rule is that items considered necessary for modern life are typically exempt from liquidation. This protects the personal property you need while turning over non-exempt assets that you can live without.

However, even daily necessities come with limits or are subject to oversight. For instance, necessary clothing can be kept, but your collection of gowns, suits, and furs may have to be sold off. Vehicles, homes, and wages may be kept only in portion or up to a specific value. For example, you may be able to keep a family minivan but will have to sell your much more valuable sports car.

There are also gray areas when it comes to deciding if an item is necessary, especially when those items relate to work. For example, if you write for a living, do you require multiple computers or just one? If you work in construction, how many tools are for work compared to a home workshop? Every case is different, and it may be up to the judge to decide what you get to keep.

State Exemptions or Federal Bankruptcy Exemptions?

Even though bankruptcy cases fall under federal law, states can create their own bankruptcy exemption laws. Different states take different approaches to property exemptions. Some states provide broad protections, while others offer little for bankruptcy filers.

In some states, you have the choice to choose between taking the state exemptions or federal exemptions. Talk to your attorney if you want to know what property you can keep and what you must sell. Your attorney can run through a few scenarios to ensure you get the most out of your bankruptcy filing.

Federal Bankruptcy Exemptions

Under federal law, the federal government provides for the following set of exemptions (as of August 16, 2023):

  • Homestead exemption (up to $27,900)
  • Motor vehicle exemption (up to $4,450)
  • Household goods (total $14,875)
  • Jewelry ($1,875)
  • Tools of the Trade ($2,800)
  • Pension and retirement accounts
  • Life insurance policies
  • Personal injury claims
  • Public benefits
  • Veterans’ benefits
  • Unemployment compensation
  • Social Security benefits
  • Public assistance

Filers can use a wild card exemption to add additional property and assets that don’t fit into another category or exceed the limit. This is like a catch-all category.

State Bankruptcy Exemptions

Exemptions under state law have many more categories of protected assets. Other exemptions covered by some states include:

  • Wedding rings
  • Firearms
  • Alimony
  • Health aids
  • Wrongful death awards
  • Musical instruments

Homestead Exemptions

For many families, their most valuable asset is their home. Even if you still owe on the mortgage, you may still have a lot of equity tied up in your home. Many states have higher exemption amounts for homesteads compared to the federal government. For example, Massachusetts has a homestead exemption of up to $500,000.

Several states have an unlimited homestead exemption, meaning you can keep your home no matter how much it is worth, including Florida, Texas, and Washington, D.C. However, some states, including New Jersey and Pennsylvania, have no homestead exemption.

Losing What You Expected to Keep

Before starting the Chapter 7 bankruptcy process, it is crucial to know what you can keep and what you cannot. If you’re looking through the above list of items and finding yourself surprised by some of the things that are not on the list, you’re not alone. It is possible to lose assets that you thought you would be allowed to keep.

However, before you think you won’t be able to keep your precious family heirlooms, jewelry, collectibles, or guns, make sure you talk to a bankruptcy attorney. Your state may have much broader protections to allow you to keep important property, even after filing bankruptcy.

For example, family heirlooms and musical instruments are generally non-exempt property under many state and federal laws. However, other states do exempt these items. If you declared bankruptcy in Utah, for example, you could exempt musical instruments up to $1,000 and family heirlooms up to $1,000.

It can be challenging to get an idea of what is covered and not just by looking online. An experienced bankruptcy attorney will be familiar with the bankruptcy laws where you live. Your attorney can explain what is covered and what you must sell so you will be prepared before you file.

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