What Can You Keep in Bankruptcy? Exemptions Explained Simply

What exemptions are

When you file for bankruptcy, a bankruptcy estate is created. It generally includes your legal and equitable interests in property when the case begins, and a trustee administers it under the rules of the chapter you file. Exemptions are the rules that let you keep certain property, either entirely or up to a set value.

Exemptions generally protect your equity, meaning the value above what you still owe on the property. If your car is worth $8,000 and you owe $6,000 on the loan, your equity is $2,000. That equity is what the exemption applies to.

Federal exemptions vs. state exemptions

There isn't one national set of exemptions. Section 522 of the Bankruptcy Code sets up two tracks, and which ones are available to you depends on where you live.

The federal list in section 522(d) covers a homestead, one motor vehicle, household goods and clothing, jewelry, tools of your trade, health aids, certain life insurance, certain benefit payments, certain personal injury and similar awards, retirement funds, and a "wildcard" that can be applied to any property.

The state track is your state's exemption law, plus exemptions available under federal laws outside the Bankruptcy Code. Tax-exempt retirement funds are protected under either track.

The Bankruptcy Code lets each state require its residents to use the state track instead of the federal list. These are called opt-out states. Where a state has not opted out, you can choose either the federal list or the state track, but not mix the two. Spouses filing a joint case must make the same choice.

Two practical notes. First, the dollar amounts in both systems change over time, so check the figures in effect where you file rather than relying on any article's numbers. Second, which state's law applies depends on where you've been domiciled. Generally it's the state where you lived for the 730 days, about two years, before filing, with fallback rules if you moved during that time. If you've relocated recently, raise that with an attorney early.

What exemptions typically cover

These are common categories, not a universal list. State laws differ in which property they protect and how much they protect.

Your home. A homestead exemption protects equity in the home you live in. Some states protect substantial equity; others protect a modest amount.

Your car. Exemptions usually cover equity in a motor vehicle up to a set amount. A vehicle with equity above the applicable limit may not be fully protected.

Household goods and personal belongings. Clothing, furniture, appliances, books, and similar items for personal or family use are commonly covered, often with per-item and total limits. Collections and valuables beyond those limits get closer review.

Tools of your trade. The equipment, books, or tools you need to earn a living may be protected up to a set amount.

Retirement accounts. Many tax-qualified retirement funds are protected in bankruptcy, but the account type, contribution history, and statutory limits can matter, particularly for certain IRAs.

The wildcard. Where available, a wildcard exemption can protect equity in property that doesn't fit another category, such as cash or part of a tax refund, up to applicable limits. Under the federal list, part of an unused homestead exemption can be added to the wildcard. Not every state provides a wildcard.

Benefits and support payments. Certain benefits and support rights may be protected under federal or state law, but the source of the funds, how they are held, and statutory limits matter.

Exemptions must be claimed

Exemptions are not applied automatically. You claim them by listing the property and the exemption you're using on Schedule C, "The Property You Claim as Exempt," part of your bankruptcy paperwork. Unless someone objects, property properly claimed as exempt is generally treated as exempt. Property you don't claim may remain available to the trustee.

Choosing between exemption systems where you have a choice, valuing property accurately, and claiming each exemption correctly is detail work. Mistakes can cost you property you might otherwise have kept, which is one reason the attorney conversation matters.

What the trustee does with nonexempt property

In Chapter 7, the trustee gathers and sells nonexempt assets to pay creditors. For each asset, the practical question is whether its value exceeds the liens on it, the exemption you claimed, and the costs of selling it by enough to produce meaningful value for creditors. If it does, the trustee can sell it, pay the liens, pay you your exempt amount, and distribute the rest.

According to U.S. Courts, most Chapter 7 cases involving individual debtors are no-asset cases. In those cases, the property is exempt, covered by liens, or not worth selling, so there is nothing for the trustee to distribute to unsecured creditors.

How exemptions work in Chapter 7 vs. Chapter 13

In Chapter 7, which is a liquidation, exemptions decide what the trustee can and can't sell. Exempt property stays with you. Nonexempt property with real value can be sold.

In Chapter 13, you generally keep your property while you fund a court-approved repayment plan, subject to the plan's terms and secured creditors' rights. Exemptions still matter: unsecured creditors must receive at least as much through the plan as they would have received if your nonexempt property had been liquidated in Chapter 7. Nonexempt equity isn't sold, but it can raise the minimum your plan must pay unsecured creditors. The actual plan payment also depends on your income and other legal requirements.

Which chapter you can use is a separate question. Chapter 7 eligibility can depend on the means test, and Chapter 7 vs. Chapter 13 compares the two more broadly.

What exemptions don't do

An exemption does not by itself remove a valid lien. It protects your equity from the trustee and unsecured creditors, but a mortgage or car lender's lien generally stays with the property. A discharge can end your personal liability on qualifying debts, but it does not extinguish a lien. If you want to keep secured property, you generally need to keep paying the loan or otherwise address it in the case, or the lender may be able to repossess or foreclose. Some liens, such as certain judicial liens that impair an exemption, may be avoided through separate procedures when the legal requirements are met.

Exemptions don't protect everything. Second properties, valuable collections, luxury items, and cash beyond available exemptions are the kinds of assets trustees examine. If you're unsure whether something specific is protected, ask an attorney before you file.

What to ask a bankruptcy attorney

If you're meeting with an attorney, put exemptions on the agenda. Useful questions:

• Does my state let me choose between the federal and state exemptions, or am I limited to one?
• Given what I own, which exemption system protects more of my property?
• Is any of my property at risk of being sold by a trustee?
• I have a mortgage or car loan. What does filing mean for keeping the property and the payments?
• Are my retirement accounts fully protected?

Bring a list of what you own, what each item is worth, and what you owe on it.