Exempt Property in Bankruptcy

The concept of bankruptcy for most individual filers is not overly complicated: you file some paperwork, the court sells off your valuable assets, the money from that sale is given to your creditors to pay off some of your debt, and almost everything else is wiped clean. In the end, you walk away with less property, but a clean start on your financial future. Of course, even though it is conceptually simple, it is also deeply terrifying – it is not easy to give up everything you own.

Fortunately, some classes of property are exempt from this liquidation process. Of course, these rules are the most complex of all bankruptcy rules, partly as a means of combating bankruptcy fraud and also because the cost and standard of living vary greatly depending on where you live in the United States.

If you are wondering which rules apply to you, nearly every state has some local rules that will apply. However, in about 20 states, you are allowed to pick between local rules and a default set of federal rules. In the rest of the states, the state lawmakers have opted out of the federal rules and only allow you to use their local rules. And one more thing to remember: if you haven’t lived in your current state for at least two years, your state rules may not even apply to you (and you’ll need to look at a very complicated test to see which rules do apply).

Which States Allow You to Use Federal Exemption Rules?

While every state has its own rules, less than half of the states give you some extra flexibility and allow you to pick whether you want to live by the state rules or the federal rules. This extra flexibility allows you to choose the rule set that protects your assets best — perhaps the federal rules give you more flexibility on your home than your state rules, such as is the case for New Jersey filers. If you are in one of these states, picking between the rules can be very tricky and consequential for your financial future — pick the wrong set and you might forfeit one of your most valuable assets, such as a house or car. It is doubly important if you are filing in one of these choices of the law states that you seek the advice of experienced legal counsel in order to maximize your exemptions and not forfeit the property that matters most to you.

What are the Federal Exemption Rules?

The federal exemption rules protect everything from your home to your retirement accounts. Many of these exemptions include value caps — a dollar amount that keeps filers from protecting extremely valuable property as a means of the game in the bankruptcy process, such as trying to keep a Lamborghini as your automobile exemption.

Some of the federal exemptions include:

Homestead Exemption

Your family home is probably one of your most important assets, assuming you own your own home. If you do, you can exempt up to $27,900 in equity —the value of the property after subtracting what you still owe on your mortgages. Remember that married couples, if they are filing jointly, can double that exemption.

Wild Card Exemption

If you do not own real estate, or your property has no equity (you owe as much as it is worth or your mortgage is underwater), you can choose to protect anything else that is important to you up to $13,950 as a wildcard exemption. This can be a car, a boat, a horse, or even something that doesn’t serve as transportation. It can also be tacked on to another exemption where your property is worth too much to be protected by that exemption alone — think of a $10,000 car, which is more than the automobile exception.

Automobile Exception

Your car gets you to work, gets your kids to school, and helps you get food in the door. But for most people, outside of a place to sleep, their car is their most important asset when they emerge from bankruptcy court on a path towards a fresh financial start. Fortunately, you can keep your car if the equity in it is $4,450 or less (or if you have that wild-card exemption to use on any value of the car above $4,450).

Other Personal Property 

You can protect $14,875 in household goods, furnishings, appliances, clothes, and other miscellaneous personal property, though no single item can be worth more than $700. You can also protect $1,874 in jewelry and $2,800 in tools of your trade.

Retirement Income and Public Benefits

Most categories of public benefits, such as Social Security, disability, and unemployment are exempt from bankruptcy. Further, most retirement accounts such as pensions, 401(k), 403B, and IRA accounts up to $1,512,350 aren’t touched in a bankruptcy case either. There are various other categories, such as alimony, child support, and wrongful death recovery that are likely exempt as well. If you have an income stream that is not an ordinary job or 1099 independent contractor income (consulting or gig work), and you are not sure if it is exempt, discuss your income stream with a bankruptcy attorney before filing so that you were not caught without income after your case is done.

Exemptions are the Most Complicated and Important Part of Your Filing

With state rules, federal rules, and occasionally a choice between the two sets of rules, not to mention the complicated test when you have moved in the last two years to determine what rules to look at, it can be very difficult to tell which rules apply and which rules to pick if you are given a choice. However, if you have any assets to protect, this is probably the most important decision you will make. This is where the experienced advice of a bankruptcy attorney can really pay off; they can help you determine which rules apply, which maximize your exemptions, and which will protect any assets of yours that are personally important to you, such as your family home. Get in touch with one of our network attorneys today for a consultation and to get your questions about bankruptcy exemptions answered.