What Are Exemptions In Bankruptcy And What Do They Do?
Exemptions are “protections” for value in certain assets (property) that you own or in which you have some interest.
This is important particularly in a Chapter 7 case because if your property is not exempt, the Trustee can sell it.
In a Chapter 13 or Chapter 11 case, you will not lose any of your property, BUT the exemptions will determine in part how much you will be required to pay out over time to your creditors through your repayment plan.
What If My Property Is Not Exempt?
If an asset (property) is not exempt, then in a Chapter 7 case, the Trustee in bankruptcy can sell the asset to pay your creditors. In other chapters you would be required to pay your creditors (over time) at least the value of the nonexempt assets.
So, exemptions can be very important.
For example, if you have a house that you’re living in and it has $80,000 of equity, you could lose it in a Chapter 7 case unless the exemption laws applicable to your case provide for protecting at least that amount of equity in your homestead.
What If My Property Is Exempt?
If an asset is exempt (or if a specified value in an asset is exempt) then your creditors (or a Trustee in bankruptcy) cannot take that asset (unless it is worth more than the exemption amount) pursuant to a judgment lien or other legal process. (there are exceptions to this for some creditors, such as the Internal Revenue Service, to whom exemptions for some reason don’t seem to apply).
Exemptions are created by State Law. There are also federal bankruptcy exemptions, but depending on which state’s exemption laws apply when your case is filed, you may or may not be able to use the federal exemptions.
Different states have very different exemption allowances.
Which State’s Exemptions Laws Apply To Protect Your Assets?
How do you figure out which State’s laws apply in your case?
The exemption laws that apply is the State or local law applicable as of the date the bankruptcy case is filed in which the debtor’s domicile has been located for the 2 years (730 days) immediately preceding the filing of the case. If the debtor(s) have lived in more than one State during that 730-day period, then it is the State where the debtor lived for the greater part of the 180-day period PRIOR TO the 730 days.
Confusing? You have Congress to thank for this, as these provisions were added by Congress in 2005 under the new bankruptcy laws
What this means is that if you have lived in the same state for the past 2 years, then that state’s exemption laws will apply in your case. However, if you lived in more than one state during the past 2 years, then you have to look at where you lived for the 6 months PRIOR to that 2 year period and if that was more than one place, the exemption laws of wherever you lived for the greater part of that 6 month period determines the exemption laws that will apply.
Need more confusion? OK, glad to help. Many states allow you to use the Federal exemptions if the result of the location calculations above are in a state different than the one in which you are filing your case.
California’s Bankruptcy Exemptions
For details of California’s two sets of bankruptcy exemptions, see California Exemptions .
California has two different sets of exemption statutes which provides very different allowances. They cannot both be used; either one or the other.New Higher California Homestead Exemption
An experienced bankruptcy attorney can advise you on which and to what extent your assets are exempt. This is yet another reason why it’s critical to hire an experienced bankruptcy attorney.
As a side note, paralegals and bankruptcy petition preparers (“BPPs”) are prohibited by law from determining which exemptions to use in your case.
See more on limitations of paralegals in bankruptcy cases.