Bankruptcy exemptions allows a debtor to exempt, or keep property and assets up to a certain value which the government believes is necessary to gain a fresh start or to continue being productive members of society. Put in a different way, it helps the debtor determine how much s/he has to pay in bankruptcy. It is a powerful tool for the debtor to use to maximize the protection of property from liquidation through the bankruptcy process.
There are two sets of exemptions: Federal Exemptions provided by the Congress detailed at 11 USC 522 and State exemptions provided by state legislatures who have opted out of the federal exemptions. For example, Alabama has opted out of the more generous federal exemptions and requires its residents to use the limited exemptions listed in the Alabama Code. On the other hand Michigan, allows the filer to select either the Federal or the state exemptions. State exemptions are explicitly different from state to state. Which exemptions a debtor can use vary depending on where s/he lives and where they have lived for the past 3 years.
Generally, exempt property can include:
- Motor vehicles, up to a certain value.
- Reasonably necessary clothing.
- Reasonably necessary household goods and furnishings.
- Household appliances.
- Jewelry, up to a certain value.
- A portion of equity in the debtor’s home.
- Tools of the debtor’s trade or profession, up to a certain value.
- A portion of unpaid but earned wages.
- Public benefits, including public assistance (welfare), social security, and unemployment compensation, accumulated in a bank account.
- Damages awarded for personal injury.
If the debtor has more assets than can be exempted, then the bankruptcy trustee can sell the items, give the debtor the exempted amount (if any), and use the rest to pay back some money to the creditors. However, it has to be worth the trustee’s time and expense to do this.
Exemptions and exemption planning generate a lot of litigation and the penalties for getting it wrong are harsh. Therefore it’s always good to seek expert help.