Chapter 7 and Chapter 13 are the two main types of consumer bankruptcy. In a Chapter 13 bankruptcy, you create a payment plan for three to five years that the bankruptcy court must approve. For a Chapter 7 bankruptcy, you must turn over all your assets to the bankruptcy trustee for sale to satisfy your creditors. However, each state allows you to protect a certain amount of your assets from creditors.
Federal vs. State Exemptions
Bankruptcy is a federal procedure, and the federal government publishes a set of federal bankruptcy exemptions. Each state also provides a list of bankruptcy exemptions, and in some states you can choose whether you wish to use the federal or state exemptions. However, most states do not allow you to choose and require you to use state exemptions. The 15 states that allow you to use the federal exemptions are Arkansas, Connecticut, Massachusetts, Michigan, Minnesota, Washington, Wisconsin, Hawaii, Vermont, Texas, New Jersey, New Mexico, Pennsylvania, South Carolina and Rhode Island. Washington, D.C., also permits the use of federal exemptions.
Categories of Exemptions
Certain states allow exemptions in particular property categories that are not allowed in others, and the amounts typically vary considerably from state to state. Commonly used exemption categories include homestead, personal property, wages, pensions, public benefits, tools of the trade, miscellaneous and "wild card" (an exemption you can claim for an object that normally wouldn't qualify).
In a bankruptcy proceeding, you may value your assets at fire sale or thrift market prices rather than retail. You can also split an asset's value across more than one exemption category if applicable. For example, if your car is worth $5,000 but your state's motor vehicle exemption is only $3,000, you can protect the remaining $2,000 by using your state's wild card exemption, if one exists.
If your assets exceed all applicable exemption levels, they are subject to seizure by the bankruptcy trustee in a Chapter 7 proceeding. In reality, the effort and cost to collect certain assets may preclude a trustee from acting. If items of significant value are set for liquidation, the trustee may offer you the chance to buy the property back rather than sell the property to a third party.
- United States Courts: Liquidation Under the Bankruptcy Code
- United States Courts: Bankruptcy Process
- Moran Law: Exemptions
- The Bankruptcy Site: Bankruptcy Exemptions
- Moran Law: What Happens to Assets That Have Non-Exempt Equity?
- AllLaw. "Federal Bankruptcy Exemptions." Accessed Oct. 12, 2020.
- NCLC Digital Library. "Increase of Federal Bankruptcy Exemptions, Other Dollar Amounts: April 1, 2019." Accessed Oct. 12, 2020.
- Justia. "Federal Bankruptcy Exemptions." Accessed Oct. 12, 2020.
John Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to writing thousands of articles for various online publications, he has published five educational books for young adults.