Under state and federal law, not all property can be taken to satisfy a creditor judgment. This property is known as exempt property. Certain property remains the property of a debtor so individuals can be productive members of society. Additionally, some goods such as used household goods have little value other than to the debtor.
What Property is Exempt?
What property will be considered "exempt property" depends on state and federal law. A set of exemptions is listed under federal bankruptcy law. However, federal law allows states to "opt-out" of those exemptions and create their own exemptions. In some states, a debtor has a right to choose between state and federal exemptions when declaring bankruptcy. Other states require the debtor to select only state exemptions. Typical exemptions are:
- Homestead (equity in the personal residence or as set by state law)
- Personal vehicle (up to a certain value)
- Used household goods, furnishing, clothes, books, personal belongings
- Jewelry (up to a certain value)
- Social security benefits, disability benefits, unemployment benefits, workers compensation benefits, veteran's benefits
- Tools of the trade (certain professional books, tools or trade implements)
- Unmatured life insurance (up to a certain value)
- Payments arising from a stock bonus, pension, individual retirement account, or annuity
- Alimony, separate maintenance, child support
- Funds in qualified state college savings funds
How Much is Exempt?
When calculating the exemption value of property, only the current sale value of the property is used. If the property has a lien or mortgage, the exemption amount is based on value of the value of the property minus the lien amount.
All states provide an exemption to cover a debtor's primary residence, at least up to a certain dollar amount. This is known as the homestead exemption. The dollar amount of the personal residence that is considered exempt is set by state statute. Creditors can sell the home if the value of the home exceeds this amount to satisfy their claims, but the debtor is allowed a certain amount from the proceeds. Other states allow broad homestead exemptions with no limit on the dollar amount of the exemption.
Under Chapter 7 bankruptcy, whether one may keep a mortgaged home depends on whether there is any equity in the home. If there is no equity, or all of the equity is exempt under the state's homestead exemption, the trustee will allow the debtor to keep the home as long as he continues payment.
Personal Vehicle Exemptions
States also provide an exemption for a debtor's primary vehicle, at least up to a certain dollar amount (typically $1000). In a bankruptcy, if there is no equity in the vehicle, the trustee will allow the debtor to keep the vehicle. If there is equity, the trustee may require a sale of the vehicle. However, the debtor may be able to keep the vehicle if he purchases the equity from the trustee or reaffirms the debt in writing and keeps making payments. The debtor may also be able to buy the car from the secured creditor in a single payment. Some states allow the debtor to keep the vehicle as long as payments are continued.