Bankruptcy Exemptions - What Do I Keep When I File For Bankruptcy?

You're concerned that you could lose property in bankruptcy—and you're right. But you can eliminate surprises with careful planning. Start by learning how exemption laws protect assets in bankruptcy. Here are the basics:

• Your state decides which property you can save.
• You'll lose unprotected property in Chapter 7 and pay to keep it in Chapter 13.
• Timing rules tell you the state's exemption laws you'll use.

You'll find more details below. To check for common issues in your bankruptcy case, try the ten-question bankruptcy quiz—it flags areas you'll want to look into further.

Protecting Property With Bankruptcy Exemptions

No one loses everything they own in bankruptcy. You'll likely be able to keep some equity in a home, furnishings, an inexpensive car, and your retirement account. However, the specifics vary between states.

Every state has a set of exemption laws, but some states allow you to choose between your state exemptions and federal bankruptcy exemptions. And California is unique in that it has two sets of state exemptions from which a debtor can choose.

If you have a choice of exemption systems, you'll select the one that best protects your property. You can't mix and match between two exemption schemes, but if you choose the state exemptions, you can also use the federal nonbankruptcy exemptions.

Bankruptcy Exemptions in Chapters 7 and 13

Exemptions work differently in Chapters 7 and 13. In Chapter 7 bankruptcy, you lose property not covered by an exemption. The bankruptcy trustee responsible for managing your case will sell the property for the benefit of your creditors.

In Chapter 13 bankruptcy, you can keep all of your property; however, that luxury comes at a price—literally. You'll pay your creditors the value of any property not covered by an exemption in your Chapter 13 repayment plan.

For example, say you own a car outright worth $3,000, and your state has a vehicle exemption of up to $5,000. Here's what would happen in each chapter.

• Chapter 7 Bankruptcy. If you file for Chapter 7 bankruptcy, you will get to keep your car because the exemption would protect the equity fully. In the same example, if your vehicle were worth $15,000, the bankruptcy trustee would sell your car, pay you $5,000 for the exemption, and distribute the rest to your unsecured creditors.
• Chapter 13 Bankruptcy. In Chapter 13, you wouldn't need to pay extra to your creditors through your repayment plan. However, if the car were worth $15,000, you'd need to pay your creditors at least $10,000 (minus sales costs) through your plan.

Keep in mind that these examples don't take into account a vehicle loan. For more information, read How to File Bankruptcy Without Losing a Car.

Bankruptcy Exemptions by State

To figure out if all of your property is safe, start by doing an inventory of your property. Next, use online sites like Realtor.com, Zillow.com, KBB.com, Nada.com, and eBay for replacement value estimates. You can even use Craigslist or Facebook Marketplace, but strive for accuracy and make copies of comparable listings. The trustee might require a professional appraisal for unique items.

Finally, select the exemption system that covers the property you'd most like to keep if you have a choice between two (and if you moved to a new state in the last two years, check the timing rules below).

If your state isn't listed, you'll find more state exemptions here.

Timing Rules and Bankruptcy Exemption Selection

Some states have significantly more generous bankruptcy exemptions than others. But you can't move there and immediately use them. To prevent abuse, you must live in the state for at least two years—otherwise, you'll use the previous state's exemptions. Here's how it works.

If you've made your permanent home (your "domicile") in your current state for at least two years, you can use the state's exemptions (or the federal exemptions if allowed).

If your domicile hasn't been in the same state for two years, the rules get more complicated. So prepare yourself—this is going to sound strange. But we'll explain it two ways so you'll know you didn't read it wrong. Here's the first way: You'll choose the state that you lived in the longest during the 180 days immediately before the two years before filing.

Did you get that? Here's the second explanation, just in case. Count back two-and-a-half years. Then ask yourself where you lived the longest during the first six months of that two-and-a-half-year period.

Still confusing? Let's try an example. Suppose you planned to file on January 1, 2022. Your two-and-a-half-year period would start July 1, 2019, and you'd qualify to use the exemptions of whichever state you resided in the most during the July 1, 2019, through December 31, 2019 period. You wouldn't have to file your case there, but you'd use that state's exemptions. Hopefully, that helps!

Special Homestead Exemption Rules

The homestead exemption protects your ownership interest in your home. You'll need to read your state's homestead statute to determine the specifics, such as the amount of equity and acreage covered, whether the exemption protects a manufactured home, and if you need to file a homestead exemption with the county clerk. But in all states, the property must be your residence. Also, you'll need to comply with a federal timing law—here's the rule:

You must live in the home for more than 40 months before filing for bankruptcy. Otherwise, your homestead exemption is capped at $189,050 if you file on or after April 1, 2022 (the amount changes every three years). This cap won't apply if you bought your home with home sales proceeds from that state.

Find out more in Chapter 7 Homestead Exemption in Bankruptcy.

Navigating Your Bankruptcy Case

Bankruptcy is an unusual area because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.

One way to keep track of your research is to use the bankruptcy forms as an outline. You'll find links to the exemption-related bankruptcy forms and other exemption resources in the chart below. You can also look at the list of Chapter 7 and 13 bankruptcy forms to see where this topic fits in the bankruptcy scheme. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.

Need More Info?

We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.