Exemptions in Chapter 7 bankruptcy allow you to keep some or all of your property after you file a Chapter 7 case. There are exemptions for all kinds of property, including furniture, cars, houses, pensions, cash, and tools.
The actual exemptions you have available to you will depend on the state in which you file bankruptcy and whether you choose to state or federal exemptions. However, the application of exemptions to your property is the same -- the Chapter 7 bankruptcy trustee cannot take and sell exempt property.
(To learn which exemptions you can use (federal or state), federal exemption amounts, and the exemption amounts in your state, see our Bankruptcy Exemptions area.)
The Bankruptcy Estate
When you file for Chapter 7 bankruptcy, you must list all of your property in your bankruptcy papers. The court appoints a bankruptcy trustee to administer your bankruptcy case and estate, and sell your property in order to repay your creditors. However, if an item of property is exempt, the trustee cannot touch it. Bankruptcy exemptions allow most Chapter 7 filers to keep their things.
(To learn more, see Chapter 7 Bankruptcy.)
How Exemptions Work
Exemptions are laws that allow you to protect value in your property by exempting that property from the bankruptcy estate. Exempting property from the bankruptcy estate prevents the trustee from selling it and allows you to keep it. Alternatively, if you can only exempt a portion of the asset's value, the trustee can sell the asset, but he or she must pay you the exemption amount from the sale proceeds.
Exemptions apply to equity in property. If you own the property free and clear, you must exempt the entire value to protect the asset. If you owe money on the asset, the equity is the difference between the value of the asset and the amount you owe. For example, if you owe $100,000 on your house but your house is worth $125,000, you have $25,000 in equity, and if you do not exempt that equity, the trustee will either try to sell your house or demand that you pay the equity into the estate.
What Exemptions Can Do for You
Bankruptcy law provides a list of different types of property that you can exempt from the bankruptcy estate, up to a certain dollar amount. If you have the type of property described in the exemption law, you can exempt the value of that property's equity up to the amount shown in the exemption.
Example. If you own a car worth $10,000 and you owe $7,000 on the car loan, you have $3,000 in equity. If the exemption laws you choose allow you to exempt up to $3,450 in a motor vehicle, you can exempt that $3,000 in equity, and the trustee will have no claim to the vehicle. (Note that if you owe money on a house or a car and you want to keep it, you must still repay the loan otherwise the lender can repossess or foreclose.)
Example. If you own a recreational speedboat worth $15,000 and you do not owe money on it, your equity in the boat is $15,000. If the exemption laws you choose do not have an exemption for recreational vehicles, you may be unable to exempt the boat, and the trustee may require you to turn the boat over to the estate for sale. Alternatively, if you have an exemption available that allows you to exempt up to $1,500 in any type of property (this is often called a wildcard exemption), you can apply that $1,500 exemption to the boat, leaving $13,500 in equity. The trustee will demand that you turn over the boat, but if the trustee sells the boat, he or she must pay you the $1,500 exemption.