One of the most common fears of debtors filing their bankruptcy cases, especially for the first time, is losing all their assets and properties during the process of bankruptcy. But that is not really the case when filing for bankruptcy. With the help of exemptions, debtors get to keep their assets. It’s true that a debtor may not be able to keep all their assets intact but there are ways to maximize which properties a debtor gets to keep by exemption planning.


What exactly are exemptions in bankruptcy?

In its simplest definition, exemptions in bankruptcy are meant to protect specific types of property so that a debtor can keep them after the bankruptcy process is finished. When a debtor exempts a property, then such a property is kept safe from being taken and will not be used for liquidation to pay creditors.

Are bankruptcy exemptions all the same?

There are two major types of bankruptcy exemption systems that a debtor may use when filing a case: the federal bankruptcy exemptions and the state exemptions.

Under the first exemption system, the exemptions are set since it exists under the federal bankruptcy code. On the other hand, exemptions given by the state varies because of their own set of exemptions allowed. Most states prohibit debtors within their domicile to make use of federal exemptions to avoid substantial abuse so debtors have to use the state exemptions. But then again, if both exemption systems are allowed, a debtor can only choose one system to use and not both.

How do exemptions work in bankruptcy?

Depending on the bankruptcy chapter where a debtor filed their bankruptcy cases, exemptions might work differently.

In the case of Chapter 7 Bankruptcy which is a type of liquidation bankruptcy, a debtor can keep their asset’s that is set within the state or the federal exemption system. For example, a $5,000 motor vehicle exemption allows a debtor to keep any vehicle that is worth the exact amount or below it. With Chapter 13, which is a type of reorganization bankruptcy, a debtor is only able to pay their credits depending on how much property they were avail to exempt.

What are most common types of exemptions?

Bankruptcy exemptions are classified into three major categories: the homestead exemption, the motor vehicle exemption, and other exemptions which include personal property, retirement accounts, tools of the trade, wages, wildcard and more.

Due to the state exemption system, homestead exemption varies widely from state to state just like with the motor vehicle exemption. From the example given on the first part of this post, a debtor gets to keep any vehicle that is exempted by federal or state law. Lastly is the other exemptions category. Usually, goods, properties, and assets belonging in this category have little resale value so bankruptcy trustee won’t bother selling it at all making them available for exemption. As of 2011, the federal exemption for homestead is $21,165 and motor vehicle is $3,450.

Maximizing bankruptcy exemptions

Since bankruptcy exemptions allow a debtor to keep and protect their assets, maximizing the bankruptcy exemptions provided by the state is most beneficial to a debtor especially if their state of domicile offers generous exemptions. Also, debtors should immediately claim their exemptions by including an exemption schedule when filing for a bankruptcy petition.

To make most of the bankruptcy exemptions set by federal or state law, a debtor should seek the advice of a bankruptcy attorney to help maximize the exemptions available to them.