Exemptions play a vital role in the bankruptcy system in a sense that they help determine which type of property a debtor can keep and protect when filing their bankruptcy case. One of the most common misconceptions of people who are filing for bankruptcy for the first time is that all of their properties will be taken away from them to be liquidated and pay off creditors. But this is not actually the case. With the help of bankruptcy exemptions, debtors can keep their retirement funds and pension, their house, vehicles, personal belongings, and other properties they might have.


How does exemption in bankruptcy works?

Under the law stated in the Bankruptcy Code, debtors are allowed to keep certain properties or amount of it. When done right, exempting a property allows a debtor to potentially save most of their properties. Usually, properties that are exempted in bankruptcy are considered as “necessities” that one person cannot go without and are necessary to continue working or live in a reasonable condition. This is the main reason why houses, vehicles, retirement funds, pensions, personal belongings, and other properties with a similar nature can be exempted.

Another reason why bankruptcy exemption exists is because taking each and every property of a debtor counters the main purpose of bankruptcy – which is to give bankrupt people a chance to get a clean financial slate and a fresh start. By exempting certain properties, debtors continue to work and live reasonably.

How exemptions work in bankruptcy chapters

In the case of a Chapter 7 bankruptcy, exemptions allow debtors to determine which of their properties is good for keeping. On the other hand, Chapter 13 bankruptcy exemption determine how much a debtor will have to pay their unsecured creditors.

Exemption systems

Since the United States is composed of several states, each of these states also has specific bankruptcy exemption systems. This is because there are two major exemption systems followed: the state exemptions and the federal exemptions. As the name implies, state exemptions are provided by the state whereas federal exemptions are prescribed and set by federal law. However, debtors should take note that there are only 17 states which allow choices between the two exemptions systems. One of these states, California, follow a unique exemption system since their state exemptions has two sets to choose from.

Debtors should also note that given the differences in state and federal bankruptcy exemptions, only one system can be chosen – it cannot be mixed and matched.

Types of bankruptcy exemptions

In bankruptcy, property exemptions are classified into three:

  1. Homestead exemptions;
  2. Motor vehicle exemptions;
  3. Others exemptions which include wages, tools of the trade or business, some personal properties, retirement accounts, and other properties with the same nature.

Again, bankruptcy exemptions vary greatly from state to state and determining what type of exemption system is best depends on where a debtor has their domicile or permanent home. To know which bankruptcy exemption is best to apply for your situation, having the help of bankruptcy attorney would be very much advisable.