One important part of filing for bankruptcy protection in the U.S. bankruptcy court system is creating what is known as the 'bankruptcy estate'. The bankruptcy estate collects all non-exempt property, money and assets of the debtor at the time of filing, as well as those acquired shortly after filing, and is used to repay creditors through liquidation in the case of a Chapter 7 filing, or to calculate certain provision in the case of a restructuring filing through Chapter 11, 12 or 13.
Federal and state laws provide protections for certain assets of the debtor so that not all of them are included in the estate. These protections are known as exemptions. Federal law gives each state the power to set is own value of exemptions, and to determine whether or not debtors in that state may chose to use Federal exemption amounts.
Because Chapter 7 filers must pass the bankruptcy means test established as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, most Chapter 7 filers are low income and own few assets of significant value. Due to this, a significant portion of individual Chapter 7 filings are 'no-asset' cases, in which there is no non-exempt property to liquidate.
Homestead: The homestead exemption refers to the primary residence of the debtor, including land surrounding the home. Some states, such as Texas, provide that the entire homestead of the debtor may be protected. In other states, the homestead exemption may be as little as $10,000.
Wages: Federal law mandates that a minimum of 75% of net weekly earnings OR 30 times the federal minimum wage must be exempt. Several states increase the weekly wages exemption.
Automobiles: Most states allow debtors to exempt the value of one automobile, provided its current value is below a certain amount. Some states specify that the exempt motor vehicle must be used to commute to or as part of the debtor's job. Others do not provide a specific automobile exemption, but may allow the value of a car or truck to be exempt as part of another exemption.
Personal Property: This exemption typically applies to household goods, and varies significantly from state to state. This category typically includes appliances, furniture, heirlooms, clothing, musical instruments, animals, crops and more, typically with a limit on the individual and/or collective value.
Wildcard: Most states also include a 'wildcard' exemption that can be applied to any assets not fully covered by any of the specific exemption categories.
These states allow filers to choose between the complete exemptions provided by the state OR the federal exemptions (no mixing between the two):
In addition, California offers two unique sets of exemptions, which debtors may chose between, depending on which better reflects the types of assets they own.
Certain state exemptions also provide for federal non-bankruptcy exemptions, which include qualified retirement benefits, survivor's benefits, some disability benefits and other government benefits that are protected from creditors, even prior to filing bankruptcy.
Laws may have changed since our last update. This is for informational purposes and is not legal advice. Speak to a local bankruptcy attorney for legal advice about your particular situation.