What You Need to Know About Bankruptcy Exemptions
Bankruptcy exemptions are laws that allow you to protect certain property when you file a bankruptcy. In a Chapter 7 bankruptcy, exemption laws determine what property you can keep. In a Chapter 13 bankruptcy, exemption laws may be a factor in determining how much you have to pay back to your unsecured creditors.
Most exemptions are specific to particular types of property and only up to certain amounts (though there are exceptions). For example, Nebraska has:
- $5,000 vehicle exemption
- $3,000 exemption for household goods, furnishings, and electronics
- $5,000 exemption for tools used for your trade or business
Many of these exemptions amounts are doubled if you are married and file a joint bankruptcy.
The Bankruptcy Code (federal law) defines a set of exemptions. However, most states have opted not to use the federal exemptions and instead require you to use that state’s own exemptions. These states are known as “opt-out” states.
A few states allow you to choose state exemptions or federal exemptions—but not both. Nebraska and Iowa are “opt-out” states, meaning (in most cases) you must use their own state exemptions.
Note that if you have moved to a new state recently, you may not be eligible to use that state’s exemptions—a complex set of rules apply in that case. Continue reading below for more information.
Bankruptcy Exemptions in Chapter 7
In a Chapter 7 bankruptcy, exemptions allow you to protect certain assets from being sold. In most Chapter 7 cases, debtors get to keep all of their property, but it depends on how much property you own and what exemptions are available to you. If you have property that cannot be protected by an exemption, then the trustee—the person appointed to administer your bankruptcy—can sell that property and use the proceeds to distribute to your creditors.
The following example scenarios help illustrate how exemptions work in a Chapter 7 bankruptcy. For these examples, assume you can use Nebraska exemptions, which provide for a vehicle exemption of $5,000.
Your car is worth $4,000 and you own it outright. Your car would be fully protected, meaning the trustee could not sell it.
Your car is worth $11,000 and you own it outright. You can protect up to $5,000 in equity in the car, leaving the remaining $6,000 unprotected. The trustee could sell your car for $11,000, pay you the $5,000 that is exempt, and distribute the rest of the proceeds to your unsecured creditors.
Your car is worth $11,000 but you owe $8,000 on the loan. In this case, your equity in the car is $3,000, which can be fully protected with Nebraska’s vehicle exemption. The trustee would not sell your vehicle because, if they did, the proceeds from the sale would have to first be used to pay off the balance of the car loan, and then you would be entitled to the amount exempted. This would leave no remaining proceeds to distribute to your unsecured creditors.
The above scenarios are simple examples to illustrate the concepts, but there may be other factors to consider, such as the potential costs of selling your property. For example, say you own a house that is worth $200,000 and you owe $135,000 on your mortgage, which means you have $65,000 in equity in your home ($200,000 – $135,000). Nebraska’s homestead exemption allows you to protect up to $60,000 in equity in your home, meaning $5,000 of your equity would be unprotected ($65,000 – $60,000). That $5,000 of unprotected equity could be used to pay your unsecured creditors. However, the trustee would need to consider the costs of selling your house, such as hiring a realtor, paying closing costs, etc. Those costs would likely exceed the $5,000, so the trustee would probably not sell your house since there wouldn’t be any remaining funds to distribute to unsecured creditors after accounting for the costs of sale.
Bankruptcy Exemptions in Chapter 13
In a Chapter 13 bankruptcy, exemptions may play a role in determining how much you have to pay back to your unsecured creditors through your repayment plan. If you have equity in property that cannot be fully protected with an exemption, then you must pay your unsecured creditors at least as much as the unprotected portion of your equity. In other words, your creditors must receive at least as much as they would have received had you filed a Chapter 7 bankruptcy.
Here’s an example to break that down:
- Assume you own a car that is worth $11,000 and you own it outright.
- Nebraska’s vehicle exemption allows you to protect up to $5,000 in equity in your car, leaving $6,000 of equity that is unprotected.
- In a Chapter 7, the trustee would sell your car, pay you $5,000, and pay your unsecured creditors with the remaining proceeds.
- In a Chapter 13, however, you get to keep your car but you would need to pay your unsecured creditors at least that amount of unprotected equity ($6,000) through your repayment plan.
However, note that this is just one factor that may affect the amount you pay.
For example, if you have enough disposable income to pay your unsecured creditors, say, $13,000 throughout the course of your repayment plan, then those creditors are already getting $6,000 (the amount of unprotected equity) and then some. In other words, in this example, you would pay the higher of (a) the amount of unprotected equity, or (b) the amount of disposable income you have.
Which State’s Exemptions Apply if You’ve Recently Moved?
If you have recently moved to a new state, you may not be eligible to use that state’s exemptions. This is due to a complex set of Federal domiciliary requirements that determine which state’s exemptions you can elect.
The basic rule is that you must be domiciled in a state for at least 730 days before you are eligible to use that state’s exemptions (this is known as the “730-day rule”). If you haven’t been domiciled in your current state for at least 730 days, then you look at where you were domiciled during the 180-day period between 910 and 730 days ago (this is known as the “180-day rule”).
- You lived in State X for your entire life until you moved to State Y on May 15, 2020.
- On January 1, 2021, you file for bankruptcy.
You cannot use State Y’s exemptions because you have not been domiciled in State Y for at least 730 days. Therefore, you need to look at where you were domiciled between 910 days and 730 days ago from the date you filed bankruptcy—in this case, where you were domiciled in the 180 days between July 6, 2018, and January 2, 2019. Since you lived in State X during those 180 days, you would use State X’s exemptions—even though you are currently a State Y resident and filed your bankruptcy in State Y.
If you were domiciled in multiple states during the 180-day period, the state that you lived in for the longest period during those 180 days controls.
- You lived in State X for your entire life until you moved to State Z on August 5, 2018.
- Then you moved to State Y on May 15, 2020.
- On January 1, 2021, you file for bankruptcy.
As with the previous example, you would not be able to use State Y exemptions because you have not been domiciled there for at least 730 days. Therefore, you look at where you were domiciled during the 180 days between July 6, 2018, and January 2, 2019. You lived in State X for 30 of those 180 days (until August 5, 2018) and you lived in State Z for the remaining 150 days. Because you lived in State Z for the greater period of the 180 days between July 6, 2018, and January 2, 2019, you would use State Z’s exemptions.
If you can believe it, there are even more complexities to these domiciliary rules! For example, some states specify that their exemptions can only be claimed by residents. That could put a debtor in a situation where it appears no exemptions apply!
- You lived in State X for your entire life until you moved to State Y on May 5, 2020.
- On January 1, 2021, you file for bankruptcy.
You can’t use State Y’s exemptions because you haven’t lived there for at least 730 days, but you can use State X’s exemptions because you lived there for the entire 180 days between 910 and 730 days ago—or can you? You have to read State X’s exemption laws, which state that only residents can claim State X’s exemptions. That leaves you in a position where the Federal domiciliary requirements say that you have to use State X’s laws, but State X says you can’t use their exemptions because you are not a resident of State X. Does that mean you have no exemptions available to protect your assets?
Fortunately, the Bankruptcy Code provides an exception to people stuck in this situation: if the domiciliary requirements make it impossible for you to claim any exemptions, then you are allowed to use the Federal exemptions.
If you have moved to a new state recently, you should reach out to an experienced bankruptcy attorney. There are several complexities around domiciliary requirements. The effects of these requirements may result in serious consequences—including whether you would lose any property in a Chapter 7 bankruptcy or how much you may need to pay back through a Chapter 13 bankruptcy.
We’re Here to Help
Bankruptcy exemptions can be confusing but know that help is available. Our bankruptcy lawyers have experience with various types of bankruptcies and their exemptions. We’re here to help you navigate through financial uncertainty and get you to a place of stability.
Contact us for a free bankruptcy consultation! We’ll walk through your options to determine if bankruptcy is a solid strategy for you and your family.