Keeping Property: How to Make the Best of Your Exemptions

Many people fear the very idea of bankruptcy because they believe that it means losing everything they own. In reality, though, consumers can exempt much, and often all, of their property from the bankruptcy. Exempting property - such as your home, your car, and other possessions - means that property remains outside of the bankruptcy, and will not be sold through Chapter 7 to pay creditors.

Exempting property from the bankruptcy estate is also important in Chapter 13, because it helps keep the payments in your repayment plan low. In Chapter 13, you are required to repay your unsecured creditors at least the same amount that they would have received had you filed Chapter 7, which is the total value of your non-exempt assets (those that would have been liquidated). The more you exempt in Chapter 13, the less you will have to pay through your repayment plan.

The rules regarding exemptions differ greatly from state to state. In general, assets are divided into different classes, such as your home (or at least a portion of your equity in your home, known as the “homestead exemption”), car, jewelry, household items, tools of the trade, etc. with a maximum total dollar value per category. Many states also allow for a “wildcard” exemption: a certain dollar value of property that can fall under any category.

For example, if your state allows you a $20,000 homestead exemption, and your equity in your home is less than $20,000, you will be allowed to keep your home. If your equity is more than $20,000, the trustee may order that the home be sold - but you will receive the value of your exemption from the sales proceeds, the $20,000, and the remainder will be distributed between your creditors. If your jewelry exemption is $2,000, and the total value of jewelry you own is $1,500, you will be able to keep all of your jewelry. However, if your one piece of jewelry is a wedding ring worth $5,000, the trustee will order that it be sold (unless you are able to claim the excess value on a wildcard exemption) and you will receive $2,000 of the sales proceeds.

State exemptions or federal exemptions

In the United States, bankruptcy is a matter of federal jurisdiction, and there is a list of federal exemptions that you can use. However, there are also state laws regarding bankruptcy, and they differ substantially from state to state. Many states also have their own, different list of allowable exemptions. Some of those states will allow you to choose whether you use the federal exemptions or the state exemptions (so you can pick whichever list is more favorable to your situation), but many states will only allow you to use the state exemptions.

You may not mix and match between federal and state exemptions. It’s important that, if you have the choice between federal and state exemptions (or if you have a choice in which state exemptions to use: see domicile requirements, below) that you review the exemption lists available to you and use the one that allows you to keep the most.

Here again is good reason why you should hire professional legal counsel: making sure you list all of your exempt property is one of the most important parts of filing bankruptcy. This is the list of everything that you will be allowed to keep. Anything that is not on the list may be sold to pay your creditors (or, if in Chapter 13, you are required to pay its value to your creditors).

The following states currently give you a choice between using the state exemptions or the federal exemptions:  Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

Federal non-bankruptcy exemptions

There are also asset exemptions that are listed outside of the Bankruptcy Code that may be available to some people in some specific situations. These are known as the federal non-bankruptcy exemptions. There are only available to debtors who are using the state list of exemptions; you cannot use both the federal bankruptcy exemptions and the federal non-bankruptcy exemptions in your filing.

The main classes of assets that the federal non-bankruptcy exemptions can protect are:

  • retirement benefits for: civil, foreign or military service employees; railroad workers; CIA employees; veterans; military Medal of Honor Roll; and social security benefit recipients
  • death and disability benefits for: longshoremen; harbor workers; government employees
  • benefits for risk, hazard, injury or death resulting from war
  • survivor’s benefits for: lighthouse workers; certain judicial employees; and those in the military service.

There are also miscellaneous exemptions that may apply to certain members of the military, railroad workers, seamen, and members of certain Indian bands. Consult your attorney if you think you may qualify for any of the federal non-bankruptcy exemptions.

Domicile requirements: which state exemptions you can use

Exemptions that you can claim in bankruptcy vary between states. Which state exemptions you are allowed to use (as well as which state you file in, as we’ve explained above), depends upon where you have been domiciled and for how long.

If your domicile (your permanent home) has been the state where you live now for at least the last two years, then you must file in that state and also use the exemptions of that state (or the federal exemptions, if your state permits that).

If you have been domiciled in your current state for more than 91 days, but less than two years, you must look at the 180-day period that is prior to the two-year period before you filed for bankruptcy. Whichever state you lived in for the greatest part of that 180-day period is the state you should use the exemptions for. (In the case of someone who has moved around a lot over the past several years, this may have little to do with where they have actually spent most of their time). If you do not qualify to use the exemptions of any state, you can use the federal exemptions.

Note that, as explained below, there are additional requirements in applying the homestead exemption if you have owned your home for less than 40 months.

Different types of exemptions

Property exemptions are defined by category, and usually by a maximum dollar value. As we’ve mentioned, some states allow you the choice of using the state exemptions or the federal exemptions, and other states require that you use the state exemptions.

Following is the current listing of the federal exemptions. If there is no dollar value listed beside the item, it means that you can exempt the entire asset no matter what its value is. This list is current as of 2016. It is updated every three years, and the next update is scheduled for April 2019.

  • Homestead: up to $23,675 of equity in your home (principal place of residence, cannot be applied to investment or rental properties)
  • Motor vehicle: up to $3,775
  • Jewelry: up to $1,600
  • Household goods (including furnishings, appliances, clothing, musical instruments, animals, etc.): up to $12,625 total (maximum $575 per item)
  • Tools of the trade: up to $2,375
  • Health aids (unlimited)
  • Life insurance policies that have not matured except credit life insurance (unlimited)
  • Loan value of life insurance policy: up to $12,625
  • Wildcard exemption: up to $1,250 plus up to $11,850 of any unused portion of your homestead exemption.

The wildcard exemption can be used to exempt any type of property at all, and it can be added to your other exemption amounts. For example, if your car is worth $8,000 (which is more than the $3,775 allowable automotive exemption) and you have not used up your homestead exemption, you can use that wildcard exemption to make up the difference so you can keep your car. Or if you have a piano that you inherited from your grandmother that is worth $5,000, you can use your wildcard exemption to keep that piano.

Note that, if you are married and if your a filing jointly with your spouse, you can double these federal exemption limits.

Some notes about the homestead exemption

You’ll have to look up the exemption list regarding your own state, and whether or not you are allowed to choose which list to use. Many states allow a much higher value for the homestead exemption (up to $550,000 in Nevada, for example, or even the entire value of your home in some states)  while others have a very low homestead exemption (for example only $5,000 in Alabama). Some states allow married couples to double their homestead exemption whereas others do not. Some states will allow you to use any unused portion of your homestead exemption as a wildcard exemption, while others do not have a wildcard exemption at all.

Since the value of the homestead exemption is so different between states, it could be tempting for someone who knows that they will be declaring bankruptcy to sell their home, move to a state that allows for a more generous exemption, and buy a new home there. For this reason, there is some extra federal regulation in place regarding the homestead exemption.

To use a state’s homestead exemption, you must have owned your home in that state for a minimum of 40 months. The only exception to this is if you bought that home with the proceeds of the sale of another home in that same state. In that case, the time that you owned the previous home will count towards that 40-month requirement. If you have not owned a home in your state for at least 40 months, your homestead exemption will be capped to a federal limit of $155,675, even if you qualify to use your state’s exemptions for your other assets.

Property that is not exempt

Normally, if you have property that you have not been able to exempt through your list of state or federal exemptions, you will have to give up that non-exempt property in Chapter 7. However, there are cases where you may be able to keep non-exempt property.

One case would be where the value of the non-exempt property is only a small amount higher than what your exemption is. For example, if you are using the federal exemption list, which allows for a $3,775 automobile exemption, and your car is only worth $5,000, the trustee may decide that, after selling the car and paying any costs, commissions and fees associated with its sale, there will not be enough money left over to pay creditors to make the sale worthwhile.

In this case, the trustee may choose not to take that property. This is known as the trustee “abandoning” the property. If the trustee abandons your non-exempt property, you get to keep it.

You also might be able to negotiate with your trustee to exchange some of your exempt property for your non-exempt property. For example, let’s say your state allows for a jewelry exemption of $4,000, and you own a painting that is worth $3,000 that you are not allowed to exempt, but that you want to keep for sentimental reasons. Your trustee may agree to accept $3,000 of your exempt jewelry instead of the artwork, and allow you to keep the painting.

If you want to negotiate to keep some non-exempt property, you must be prepared to give up some of your exempt property. The trustee will likely only agree to the deal if the property you give up is of equal or greater value than what you want to keep, and if they deem that they will be able to sell it to recover those funds relatively easily.

In certain circumstances, you may be able to argue for property that would normally not be exempt to be exempt. For example, expensive musical instruments are not normally exempt. However, if you are a professional musician who earns a living by using that instrument, you may be able to have it exempted.

Read on for our next article in this series: Decisions About Your Home and Mortgages in Bankruptcy