Property Exempt from Bankruptcy

Filing for bankruptcy is a decision not to be entered into lightly. It's a legal proceeding with many legal ramifications. Not the least of the considerations to keep in mind is which types of property are protected (or exempt) from bankruptcy proceedings. It's vital to know what will be liquidated and what property is protected/exempted. 

Historically, state law provided the property exemptions available to those seeking bankruptcy protection. However, the bankruptcy code now allows states to choose between the federal exemptions provided in the bankruptcy code or the exemptions provided in state law. Many states have chosen to continue to follow their state law exemptions but a minority of states have decided to adopt the federal exemptions instead.

Common Bankruptcy Exemptions

Some common types of property that are exempt from bankruptcy proceedings include:

  • The Debtor’s Home - This is known as the homestead protection. Federal and state exemption laws allow a debtor to protect his or her home from creditors in bankruptcy up to a certain dollar amount. The amount that is protected varies widely from state to state. 
  • The Debtor’s Car - Bankruptcy law recognizes that many debtors need a car in order to maintain a job and meet their financial obligations. Therefore, a bankruptcy exemption exists for the debtor’s car. The exemption does not allow a debtor to spend his or her money to drive an expensive car while not repaying his or her financial obligations, however. The exemption is limited to a specific dollar amount.
  • Household Goods - Bankruptcy law sets a maximum exemption amount for all of the debtor’s household goods and a maximum amount per individual item. Often, a bankruptcy trustee recognizes that there is little value in used household goods and these items are not used to satisfy debts even if they are cumulatively worth more than the maximum amount. Household goods can include things such as pots and pans, bedding and decorative items.
  • Personal Items - Some personal items such as reasonably necessary clothing are exempt. Jewelry, up to a certain amount, may also be exempt.
  • Retirement Savings - The vast majority of retirement savings are protected by the bankruptcy code including pensions, stock bonus plans, Individual Retirement Accounts (IRAS), 401ks and other employer sponsored retirement plans. While this can be reassuring to a debtor it is often frustrating to a creditor since retirement savings may be among the most valuable of the debtor’s assets.
  • Awards in personal injury cases are typically exempt from bankruptcy proceedings.
  • Tools of the trade are exempt up to certain dollar amounts established by law. For example, a professional photographer may be able to keep expensive cameras and processing equipment that an amateur photographer would need to sell in order to satisfy his or her debts.

Despite the above list of exempt property, creditors are typically not discouraged and actively pursue their claims if a debtor who owes them money files for bankruptcy protection. The bankruptcy trustee will use the debtor’s non-exempt assets to satisfy creditor claims in order of their legal priority.

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