Bankruptcy Exemptions

In the ancient Roman world, most commercial transactions took place in open market places. Moneylenders transacted business on benches in these markets. When a moneylender failed, his bench (bancus) was broken (ruptus) to signify publicly that he was no longer in business. In the ancient world, a debt could result in the creditor taking property, or even forcing the debtor into slavery until the debt was repaid.

Modern bankruptcy is not so severe. The United States Supreme Court has stated that one of the main purposes of bankruptcy is to provide the debtor with a “fresh start.” However, taking everything a person owns to pay his creditors can make a “fresh start” impossible. Consequently, Congress has developed a complex system of property exemptions that allow the bankrupt debtor to keep property that is reasonably necessary to a new financial beginning.

Exemptions are simply laws that protect property from creditors and the trustee during your bankruptcy. Property that is “exempt” cannot be taken from you. Exemptions are only available to individuals. Corporations cannot claim bankruptcy exemptions. The federal bankruptcy code allows each state to elect either federal exemptions or state exemptions for its residents. Some states allow residents to choose between federal and state exemptions (like Texas, Michigan and Massachusetts). Other states restrict debtors to state bankruptcy exemptions only (like Nevada, Illinois, and Indiana).

Exemptions can vary widely between states. However, most states exempt some equity in at least one of your personal vehicles, and every state has an exemption that protects equity in your home (called a “homestead exemption”). For instance: the federal homestead exemption is $21,625; Alabama protects a mere $5,000 in home equity; Illinois residents can protect $15,000; Nevada residents can protect up to $550,000; and many Texas homeowners residents enjoy an unlimited homestead exemption. As a result, some wrongdoers in the Enron scandal reportedly transferred assets into lavish homes built in Texas before they filed personal bankruptcy.

The election and application of exemptions can be a decisive factor in obtaining a fresh financial start. An experienced bankruptcy attorney will guide you through the complex exemption laws and ensure that your assets are properly protected when you file bankruptcy. Very few individuals lose property in a Chapter 7 liquidation bankruptcy. Your attorney will inform you whether any of your property is at risk prior to filing your case. In most cases there are legal options to sell, transfer, or surrender property that is not protected by legal exemptions.