Understanding Bankruptcy Exemptions

When filing for bankruptcy, one is not required to surrender all of their assets and property. Exemptions allow protection for certain property and at times its’ value, depending on the type of bankruptcy that has been filed.

Bankruptcy exemptions safeguard certain possessions and property, or adjust how payments are made, when filing for Chapter 7 or Chapter 13 Bankruptcy. But exemptions vary across federal and state boundaries, and have different stipulations. It is important to have a full understanding of the various exemptions before utilizing them to ensure that it is not in violation of the law.

Chapter 7 and Chapter 13 Bankruptcy

Before being able to understand exemptions, it is important comprehend the difference between Chapter 7 and Chapter 13 bankruptcy.  Chapter 7 bankruptcy is where an individual must liquidate their assets and property in order to pay off debt. Chapter 13 bankruptcy allows an individual to restructure their debt, but maintain their assets and property in doing so. Both of these areas have distinct impacts on the type of exemptions which can be applied.

Chapter 7 bankruptcy is designed as a solution for individuals who are not able to repay their debt. However this type of bankruptcy subjects personal property, such as an individual’s home, to seizure by creditors. In filing for Chapter 7, exemptions protect property thus not allowing the liquidation of certain items. The amount of property that is allowed to be exempt is based on a number of factors, such as the magnitude of debt owed and the value of the property.

Chapter 13 bankruptcy petitions allow for individuals with sustainable income to make payments toward settling their debt over a period of time. Because of the nature of Chapter 13, exemptions play a different role. As an individual is able to maintain their property and assets under Chapter 13, exemptions serve to protect the value of particular pieces of property from being included in the repayment amount. Therefore, such exemptions reduce the amount an individual is required to pay and helps to make payments more manageable.

State and Federal Exemptions

There are variations between states as to the extent to which bankruptcy exemptions can be used. However there are also exemptions established by federal law that can be employed regardless of domicile requirements.

The use of federal or state exemptions—or both—depend on where an individual resides. Some states, like Maryland, only permit residents to use state bankruptcy exemptions. Maryland law mandates exemptions including, but not limited to, the following items:

  • Homestead
  • Tools of trade up to $5,000
  • Prescribed health aids
  • Furnishings, clothing, pets
  • Burial plots
  • Child support
  • Alimony
  • Public assistance
  • State employee retirement accounts
  • IRA accounts
  • Cash or property up to $6000

Federal Nonbankruptcy Exemptions

Exemptions exist which are mandated under federal nonbankruptcy law, and can be used in addition to state exemptions.  Federal nonbankruptcy exemptions also serve to protect assets and property, but an individual must qualify to use them. If a debtor does qualify for the use of nonbankruptcy exemptions, items such as retirement benefits, disability and survivors benefits will be protected.

Bankruptcy can often be a confusing and stressful process, but debtors should not feel as though they are helpless during that time. There are protections in place to assist debtors in retaining certain assets and property, while also settling debt. The experienced bankruptcy attorneys at Bodie, Attorneys at Law can help you understand your options and will work with you through the preparation, filing and discharge of your bankruptcy proceedings. Contact us about scheduling a consultation today.