Chapter 7 Exemptions

UPDATED: Jul 12, 2023Fact Checked

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 12, 2023

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UPDATED: Jul 12, 2023Fact Checked

Bankruptcy exemptions refer to assets that you may keep when you file for Chapter 7 bankruptcy. As a general rule, Chapter 7 or total liquidation bankruptcy will require that you surrender most of your cash and many of the possessions you own so these items can be sold.

At the end of a Chapter 7 bankruptcy, any debts you owe your creditors are forgiven and do not have to be paid. Therefore, the required sale of your assets and possessions can allow creditors to receive some of the money owed to them. While this law exists for creditor protection, the bankruptcy courts also want to make sure that those seeking bankruptcy protection do not lose everything. As such, exemptions exist to allow you to keep certain assets.

Exemptions are set on both a federal and a state level. This means that when you file for bankruptcy, you may usually choose whether you wish to use the state exemptions or the federal ones.

Some states are significantly more generous when it comes to exemptions than others. In the past, filers could take advantage of this by filing for bankruptcy in states where they weren’t permanent residents, but changes to the bankruptcy code have instituted residency requirements and put an end to this practice. However, it is still possible to make use of the exemptions of the state where you actually live, or the federal exemptions, depending on which stand to benefit you the most.

Some common exemptions on either a federal or state level include:

  • A homestead exemption that permits you to keep the value of some of the equity in your home.
  • An exemption that allows you to keep cars if the value of the vehicle is below a set dollar amount (such as $2500).
  • A wild card exemption that permits you to keep any personal property you want, valued at up to a certain dollar amount. People may use this to keep things like family heirlooms or wedding jewelry.
  • “Tools of the trade,” which are possessions you require to conduct business.
  • Proceeds from court settlements.
  • Retirement accounts, like IRAs.

This is just a brief list of some of the exemptions available. You may qualify for more or fewer exemptions depending on your finances and where you live. To understand what you will likely be allowed to keep in a Chapter 7 filing, it is important to consult with a bankruptcy lawyer in your area.

Case Studies: Illustrating Bankruptcy Exemptions

Case Study 1: Protecting the Family Home

John, a resident of California, recently filed for Chapter 7 bankruptcy. He was concerned about losing his family home, which had significant sentimental value. By utilizing the homestead exemption provided under California state law, John was able to protect his home from being sold during bankruptcy proceedings.

Case Study 2: Preserving Essential Personal Property

Sarah, a single mother residing in Texas, faced bankruptcy due to mounting medical bills. She relied heavily on her car to commute to work and transport her children. Under Texas state exemptions, Sarah was able to keep her vehicle by utilizing the motor vehicle exemption, ensuring she could maintain her essential transportation.

Case Study 3: Securing Retirement Savings

Mark, a retiree from Florida, found himself in financial hardship and decided to file for Chapter 7 bankruptcy. He was concerned about losing his retirement savings, which he had worked hard to accumulate. Thanks to the federal exemption for retirement accounts, Mark could protect his savings from being liquidated during the bankruptcy process.

Case Study 4: Safeguarding Personal Belongings

Emily, a young professional from New York, faced overwhelming debt and had to file for Chapter 7 bankruptcy. She was worried about losing her valuable jewelry and other personal belongings. By leveraging the personal property exemption provided by New York state, Emily successfully preserved her cherished items and ensured their continued ownership.

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Jeffrey Johnson

Insurance Lawyer

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Insurance Lawyer

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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