Bankruptcy Exemptions: Federal & By State

Bankruptcy Exemptions

Part of your research in deciding whether filing for bankruptcy is the best option for you is determining what you get to keep. That is usually everyone's first question - "What do I get to keep?" You'll want to know if you can keep your house, your automobile, pension and retirement funds, personal belongings, etc. The things you will be able to keep are considered exempt items. Some exemptions are governed on a Federal level and some exemptions are State-specific. However even with cases filed within the same state the exemptions may vary on a case to case basis. This page will provide you with more information regarding these exemptions.

Bankruptcy Estate

When you file for bankruptcy, the property you own at that point (and sometimes shortly after that), is part of what is called your bankruptcy estate. Federal law determines what is included in your bankruptcy estate. Every state's exemptions automatically include these. For example, 11 U.S.C. §541 excludes certain educational funds-monies you've put in an educational retirement account or a qualified state tuition program for the benefit of your child or grandchild-from your bankruptcy estate. To qualify the funds must have been deposited more than a year before you filed for bankruptcy. Funds deposited into plans more than one year but less than two years before the bankruptcy filing are excluded to the amount of $5,000. (Continued Below)

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Property that is included in your bankruptcy estate under federal law can be taken and sold to pay your creditors, unless it is exempt. The bankruptcy process offers debtors a "fresh start" if they're overwhelmed by their debts. When your bankruptcy case is closed, however, you'll still need basic possessions and assets to move forward. The Bankruptcy Code recognizes these basic needs and provides various property exemptions for debtors. If property is exempt, it won't be subject to your creditors' claims.

Claiming Exemptions

Typically, you'll include a schedule or list of your exempt property when you file your bankruptcy petition. The schedule should include a description of the property, specify the law authorizing the exemption and list the value of the exemption and the market value of the property. Market value doesn't factor in the exemption amount. This information allows parties in your case to evaluate your claim, such as creditor who might object to an exemption.

Creditors, or others interested in your case, can object to your exemptions within 30 days after the meeting of the creditors, which is one the first things to occur after you file. If someone objects, it's their burden to prove that you've improperly claimed the exemption.

What Kinds of Property Are Exempt, and How Much?

The type and amount of bankruptcy exemptions varies, and is determined under state or federal law. Exemptions used to be based entirely on state law, so your exemptions depended on where you lived, your domicile. The Bankruptcy Code tried to achieve more uniformity in exemptions with a set of minimum exemptions, allowing debtors to choose between exemptions under federal or state law. States were allowed to opt out of this framework, and require their citizens to claim exemptions based on state law.

Thirty-four states exercised this opt-out or veto power. In these states, the treatment of exemptions looks much like it did before the Bankruptcy Code was enacted. The opt-out states are: Alabama, Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. In the remaining 16 states, debtors can choose between federal and state exemptions. Talk to a bankruptcy lawyer in your area to determine which set of exemptions is best for you.

Wildcards

Several states have created a "wildcard," which is an exemption that you can apply to any property. For example, if you own a car in Connecticut worth $2,500 and the exemption for motor vehicles is $1,500, you can use the $1,000 the state allows as a wildcard to make up the difference. You can also use a wildcard to exempt property that isn't listed as an exemption, such as a piece of art. The value of the wildcard, like other exemption amounts, varies from state to state. (Continued Below)

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How to Choose Between Exemptions

The exemptions that work best for you will depend on the property you most want to protect. If your priority is to protect your home, you will focus on homestead exemptions. If your state's homestead exemption is larger than the federal exemption of $20,200, the state exemptions might work better for you. If your main asset is a motor vehicle, you will look at the amount of exemption available for a car, as well as any wildcard amount.

For example, the federal exemptions (and the alternate California exemptions) allow you to use at least part of the homestead exemption as a wildcard for other property. This means under the federal exemptions, you can exempt $3, 225 for a motor vehicle and add up to $10,125 of the unused homestead exemptions as a wildcard, plus the federal wildcard amount of $1,075. For people who don't own their homes, the federal exemptions and the alternate California exemptions are usually more favorable.

Residency Requirements

On top of the state versus federal law options, you must also pay attention to the residency requirements. The 2005 revisions to the bankruptcy laws created new residency requirements for debtors. Congress wanted to discourage people from moving to states with more liberal exemptions and then filing for bankruptcy. You must, therefore, have lived in a state for two years before you can use that state's exemptions. If you have lived there for less than 2 years, you count back 2 years from the date you file for bankruptcy and then look at where you lived for the 180 days (6 months) before that. Whichever state you have lived in for the longest time during that 6-month period is the state whose exemptions you can use. Some states, though, don't allow you to use their exemptions unless you currently live in that state. If you get caught in this gap, you'll have to use the federal exemptions.

Although you can't use state exemptions if you have lived in a location for less than two years, you can use the federal exemptions after only 91 days if the state where you're filing allows you to. For example, if you want to use the federal exemptions but live in New York, where they are not allowed, you can move to New Jersey, live there for 91 days and file for bankruptcy in New Jersey using the federal exemptions. If you have lived in a new state for less than 91 days, you must either file in the last state you lived in for more than 91 days or wait to file your bankruptcy until after you've lived in your current state for 91 days.

What about the House and the Car?

Homestead Exemption

The homestead exemption applies to property used as your residence. The federal homestead exemption for cases filed after April 1, 2007 is $20,200. State homestead exemptions vary widely. Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed, debtors would engage in bankruptcy planning to maximize this exemption. A debtor would move to a state with a generous homestead exemption and shield assets from creditors by buying an expensive home. Current law limits your homestead exemption to $136,875 if you acquired your home in the 1215-day period before filing for bankruptcy.

Exceptions apply, including the common situation where someone trades up to a more expensive home and transfers equity to the new purchase. The homestead exemption is also limited if you've used it to delay, hinder or defraud a creditor. If your equity isn't covered by the homestead exemption, it's possible in a Chapter 7 case that the trustee, who administers your bankruptcy estate, could have it sold to raise money to pay your creditors. In that case, you would want to consider filing under Chapter 13, which centers on a repayment plan spanning several years. If you don't have equity in the home, or it's within the exemption amount, you can consider keeping it. You'll still have to pay your mortgage. If you don't, the lender can seek foreclosure.

Exemptions for Automobiles

The Bankruptcy Code exemption for a car or automobile is $3,225. The equity in your car is based on the car's market value, less any loans against it. If your equity is more than $3,225, it's possible that you could apply exemption amounts from other categories, such as the exemption for tools of the trade. If the trustee sells it, you're entitled to receive the exemption amount. Finally, it's possible to pay the trustee the amount above the exemption and keep the vehicle.

How to Choose Between Exemptions

The exemptions that work best for you will depend on the property you most want to protect. If your priority is to protect your home, you will focus on homestead exemptions. If your state's homestead exemption is larger than the federal exemption of $20,200, the state exemptions might work better for you. If your main asset is a motor vehicle, you will look at the amount of exemption available for a car, as well as any wildcard amount.

For example, the federal exemptions (and the alternate California exemptions) allow you to use at least part of the homestead exemption as a wildcard for other property. This means under the federal exemptions, you can exempt $3, 225 for a motor vehicle and add up to $10,125 of the unused homestead exemptions as a wildcard, plus the federal wildcard amount of $1,075. For people who don't own their homes, the federal exemptions and the alternate California exemptions are usually more favorable.

Figuring out which bankruptcy exemptions to use and how to use them is one of the most challenging parts of filing for bankruptcy. It's difficult because bankruptcy law is a confusing mixture of federal and state law. Although the US Constitution gives the federal government the power to pass laws about bankruptcy, the federal government also gave each state long ago the authority to choose which properties a debtor can keep when he or she files for bankruptcy. The laws protecting these properties from creditors and the bankruptcy trustees are called exemptions.

Other Exemption Categories

Household Goods and Furnishings

Federal bankruptcy law and state laws provide exemptions for household goods and furnishings. The federal exemption amount is $10,775, and $525 for a particular item. However, this type of property usually has little resale value, and the bankruptcy trustee won't likely view it as a viable source of assets to use to repay creditors.

Retirement Assets

You can exempt retirement funds under § 522(d)(12) of the Bankruptcy Code. The exemption applies to pension, profit sharing and stock bonus plans, employee annuities, Individual Retirement Accounts (IRAs), deferred compensation plans such as your 401(k) account, and certain trusts. The 2005 amendments to the Bankruptcy Code expanded the protection allowed to certain tax-exempt retirement plans that weren't always protected under former law. This protection is important, as your retirement account balances are probably among the most substantial assets you have. There's a cap on the amount of exempt funds held in Roth IRAs of $1,095,000, but the cap doesn't impact most debtors.

Single or Married

In some circumstances, a married couple filing a joint bankruptcy can by definition double the amount of exemptions. You may always do this under the federal exemptions, if they are available in your state. State exemptions, however, sometimes allow you to double the exemption amount and sometimes they don't. You'll need to check your state's exemptions carefully.

If you intend to double the exemptions amount for a single piece of property, such as the homestead exemption on your residence, the property must be jointly owned by you and your spouse. Otherwise, you can only take one exemption.

What property is exempt under state laws? In general, most states allow you to keep much of your personal property, particularly that which has little or no value. You can even keep collateralized property in certain circumstances (of course, you have to reaffirm the debt).
Personal property includes tools that you use to earn a living (although there are limits on this); your clothing; and all of your household goods. As to your income, usually about 75% of your wages, and all of your unemployment and welfare benefits, worker's compensation, pensions, and insurance benefits are exempt. Most states allow you to double the amount of the exemption if you're married, but not all states, so make sure your state allows this before doing any calculations.

What property is exempt under federal laws? These exemptions are found in 11 U.S.C. §522 and can be used by anyone who is qualified to file bankruptcy in a state that allows its residents to use the federal exemptions, or by anyone who doesn’t qualify under residency requirements to use state exemptions. You have to live in a state for at least 91 days before you can file for bankruptcy there. The states that allow you to use the federal exemptions are: Arkansas, Connecticut, District of Columbia, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Washington, and Wisconsin.

Though federal law allows states to opt out of most federal exemptions, a few apply in all jurisdictions. The most important are the pensions exemptions listed below. Every state’s exemptions automatically include these.

When you file bankruptcy, you are required to fill out quite a few bankruptcy papers. Among these are Schedule C, which is a form where you list the property you are claiming should be exempt (meaning you get to keep it).

NOTE: These are the major bankruptcy exemptions, effective April 1, 2007. Check with your bankruptcy lawyer for a full exemptions list. The value allowed under each exemption is updated for inflation every 3 years, ending on April 1. Values were last adjusted in 2007.

The following exemptions list the type, section of Title 11 of the United States Code, and an explanation of the rules associated with the exemption type and 11 USC.

Homestead:

522(d)(1) Real property, including mobile homes and co-ops, or burial plots up to $20,200. Unused portion of homestead, up to $10,125, may be used for other property.

Personal Property:

522(d)(2) - Motor vehicle up to $3,225.

522(d)(3) - Animals, crops, clothing, appliances and furnishings, books, household goods, and musical instruments up to $525 per item, and up to $10,775 total.

522(d)(4) - Jewelry up to $1,350.

522(d)(5) - $1,075 of any property, and unused portion of homestead up to $10,125.

522(d)(9) - Health aids.

522(d)(11)(B) - Wrongful death recovery for person you depended upon.

522(d)(11)(D) - Personal injury recovery up to $20,200 except for pain and suffering or for pecuniary loss.

522(d)(11)(E) - Lost earnings payments.

Pensions:

522(b)(3)(C) - Tax exempt retirement accounts (which include 401(k)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, and defined-benefit plans) ; IRAs and Roth IRAs up to $1,095,000 per person.

Public Benefits:

522(d)(10)(A) - Public assistance, Social Security, Veteran's benefits, Unemployment Compensation.

522(d)(11)(A) - Crime victim's compensation

Tools of Trade:

522(d)(6) - Implements, books and tools of trade, up to $2,025.

Alimony and Child Support:

522(d)(10)(D) - Alimony and child support needed for support

Insurance:

522(d)(7) - Unmatured life insurance policy except credit insurance.

522(d)(8) - Life insurance policy with loan value up to $10,775.

522(d)(10)( C ) - Disability, unemployment or illness benefits

522(d)(11)( C ) - Life insurance payments for a person you depended on, which you need for support

Wages:

No exemption

Wildcards

Any property: up to $1,075. (d)(5)

Any property: up to $10,125 of the unused homestead exemption. (d)(5)

* unused portion of homestead to $10,125 may be applied to any property

Education Funds exempt from seizure:

Funds placed in an educational retirement account or qualified State tuition programs at least 365 days prior to a bankruptcy filing, within the limits established by the Internal Revenue Code, and for the benefit of a child or grandchild of the debtor, are excluded from the debtor's estate, with a $5,000 limit on funds contributed between one and two years before the filing.

Bankruptcy Exemptions: A Federal and State By State List of Exempt Property...