What Can You Keep in Bankruptcy? Exemptions Explained
The biggest fear people have about bankruptcy is losing everything. In reality, most people who file keep all or nearly all of their property, because exemptions protect it.
How exemptions work
An exemption protects a type of property up to a dollar value. What matters is your equity: the value of the property minus any loan against it. If your car is worth $12,000 and you owe $9,000, your equity is $3,000, and that's the amount the exemption needs to cover.
In Chapter 7, a trustee can sell property whose equity exceeds the exemption, pay you the exempt amount, and give the rest to creditors. In Chapter 13, you keep your property but your plan must pay creditors at least what they'd have received in a Chapter 7. See Chapter 7 vs. Chapter 13.
Federal vs. state exemptions
Every state has its own exemption list. Some states let you choose between the state list and the federal list; others require you to use the state list. Which set you can use can depend on where you've lived for the past two years or so. The amounts vary enormously; homestead protection in particular ranges from modest to very large.
What's commonly protected
- Home equity (the homestead exemption), up to a limit.
- A vehicle, up to a limit.
- Household goods, furniture, clothing and appliances.
- Tools of your trade.
- Retirement accounts. Most tax-qualified plans like 401(k)s and pensions are protected without a dollar limit; IRAs are protected up to a high cap.
- Many public benefits, such as Social Security, unemployment and veterans' benefits.
- A "wildcard" exemption in some systems that can protect any property.
What happens to secured debts
A car loan or mortgage is tied to the property. To keep it you generally must keep paying, and you may sign a reaffirmation agreement for a car loan. Bankruptcy can eliminate your personal liability if you choose to surrender the property.
Common traps
- Undervaluing property on your schedules. Use honest, supportable values.
- Transferring property to family before filing. Trustees can recover it.
- Paying back relatives in the year before filing, which can be clawed back as a preference.
- Forgetting assets like tax refunds, lawsuit claims or an inheritance you expect.
A bankruptcy lawyer's most important job is often choosing the right exemptions and filing at the right time. Find a bankruptcy attorney near you.
This guide is general information, not legal advice. Exemption amounts change periodically and differ by state.