What You Need to Know About Bankruptcy Exemptions

What are 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.

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.

Example 1

Your car is worth $4,000 and you own it outright. Your car would be fully protected, meaning the trustee could not sell it.

Example 2

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.

Example 3

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.

Opt-Out States

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.

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”).

Example 1

• 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.

Example 2

• 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!

Example 3

• 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.

Bankruptcy Exemptions are Designed to Protect your Assets

One of the most fundamental tasks that a bankruptcy attorney must quickly and effectively determine is what assets of his or her client are safe and protected if a bankruptcy is filed and which are not, if any. If you don’t get that analysis right, there will be BIG trouble ahead.

Normally, this is a fairly straightforward determination. Most assets are clearly identifiable and may be easily pigeonholed into the proper exemption category. However, there are times when the answer of whether or not an asset is safe is agonized over for days or weeks by a bankruptcy attorney.

Sometimes, the answer is that there is no clear answer and your client must take a chance at filing the bankruptcy after being thoroughly briefed on the matter. Moreover, sometimes the outcome of whether or not an asset is protected by an exemption must be litigated before the Bankruptcy Court.

The exemption analysis process begins by choosing the proper set of exemptions to apply to a case.

Federal bankruptcy law generally provides for each individual state to choose what exemptions their citizens may select. Typically, the set of exemptions available to a person filing bankruptcy in the State of Nebraska, for example, will be provided by Nebraska law.

Similarly, a person filing bankruptcy in Council Bluffs, IA will be utilizing the bankruptcy exemptions provided under Iowa law. Therefore, where you file bankruptcy determines, in large part, what is protected in bankruptcy. And, where you are able to file bankruptcy is determined by your residency for the greater part of the last 180 days.

Shopping for a better set of bankruptcy exemptions is now much harder
In the “old days,” some people with a lot of assets and also needing to file bankruptcy would shop around for the best deal with respect to protecting their assets in bankruptcy. For example, some states such as Florida and Texas allow their citizens to protect almost ALL of their equity in a personal residence. California is also very generous in handing out exemptions. If you don’t own a home, you could protect more than $15,000 in cash or other personal assets easily.

So, a lot of individuals used to move to a state that provided a more generous set of bankruptcy exemptions and then file bankruptcy after being there for 91 days (the majority of the last 180 days).

As of 2005, there is a strict look-back period for exemptions. In general, you must apply the exemptions where you lived about 2.5 years ago. There are tricky exceptions to these rules too. Sometimes, if a person moved a lot in the last several years, exemptions provided directly by the Federal government apply, not those of the various 50 states.

Almost All Individual Debtors in Bankruptcy have Both State and Federal Exemptions Available to Protect Certain Assets

To make things even more confusing, the type of asset in which protection is sought makes a big difference. Typically, ERISA qualified retirement funds are automatically protected under Federal bankruptcy exemptions which every individual debtor is entitled to, regardless of their state of residency. For example, 401(k)s are exempt from your creditors as are IRA accounts. Similarly, pensions and most other state provided retirement accounts are exempt. There are a few exceptions, but most are exempt. The point is that some assets are protected under Federal exemption laws while other assets must rely on state law for protection. Knowing which specific assets are protected and in which combination (Federal or State law) is critical to understanding how to protect assets in bankruptcy.

Nebraska Bankruptcy Exemption Scheme

The foundation of determining which exemption laws apply in Nebraska with respect to a bankruptcy filing starts with Neb.Rev.St. § 25-15,105. This section of the law reads as follows:

The federal exemptions provided in 11 U.S.C. 522, subsection (d), are hereby rejected by the State of Nebraska. The State of Nebraska elects to retain the personal exemptions provided under Nebraska statutes and the Nebraska Constitution and to have such exemptions apply to any bankruptcy petition filed in Nebraska after April 17, 1980.

What Does That Mean?

It means that the State of Nebraska has opted out of the federal exemptions. In other words, people who have been living in Nebraska for at least the last 2.5 years must use Nebraska exemptions.

Also, it means that the property and assets that you can protect in bankruptcy are generally dependent upon your residency. Frankly, this is pretty unfair if you think about it. Why should someone living in Iowa, for example, be able to protect ALL of the equity in their personal residence but in Nebraska you can only protect up to $60,000?

Why should a debtor in bankruptcy living in California be able to keep upwards of $20,000 in cash or in their bank account but someone in Nebraska be able to only protect $2,500 at most? Well, that’s a blog for another day, but suffice it to say that what you can protect varies from state to state for the most part.

No matter What State you Live in, Certain Bankruptcy Exemptions (and Exceptions) Are Available

This can get a little confusing, but even if you are required to use Nebraska bankruptcy exemption laws, there are certain exemptions (and other exceptions) that each and every person filing bankruptcy gets automatically…..regardless of what state they live in.

But, the assets that everybody gets to protect are limited to just a few exceptions.

For those of you who love to do their own legal research, check out 11 U.S.C. § 522. Also check out 11 U.S.C. § 541(b) which addresses specific assets that are NOT part of the bankruptcy estate.

In any event, the following assets are generally fully protected in every state:

• Retirement funds that are exempt from taxation under section 401, 403, 408, 408A, 414, 457 or 501(a) of the Internal Revenue Code of 1986.
• Interpretation: Generally, 401(k) plans, 457 plans, 403(b) plans and other similar retirement plans are 100% safe in bankruptcy. Of course, good faith always applies…..so don’t think you can stuff a lot of money into these accounts just before filing bankruptcy.
• Educational 529 Plans (100% protected) under 11 U.S.C. § 541(b)
• IRA accounts that meet certain requirements. Note: Nebraska also has a separate IRA exemption statute.

Please note that the above listed exemptions and exceptions are just the main assets protected. There are a few others that are not commonly used.

The Nebraska Wildcard Exemption

Nebraska law provides a wildcard exemption for any personal property except wages. Personal property is generally defined as anything that is not real estate or wages.

In Nebraska, each debtor in bankruptcy receives a $2,500 wildcard exemption that may be used to protect any personal property.

The specific language of the wildcard exemption is found at Neb. Rev. St. § 25-1552:

Each natural person residing in this state shall have exempt from forced sale on execution the sum of two thousand five hundred dollars in personal property, except wages. The provisions of this section do not apply to the exemption of wages, that subject being fully provided for by section 25-1558. In proceedings involving a writ of execution, the exemption from execution under this section shall be claimed in the manner provided by section 25-1516.

The debtor desiring to claim an exemption from execution under this section shall, at the time the request for hearing is filed, file a list of the whole of the property owned by the debtor and an indication of the items of property which he or she claims to be exempt from execution pursuant to this section and section 25-1556, along with a value for each item listed.

The debtor or his or her authorized agent may select from the list an amount of property not exceeding the value exempt from execution under this section according to the debtor’s valuation or the court’s valuation if the debtor’s valuation is challenged by a creditor.

In a Joint Bankruptcy Case (Husband and Wife File Together), Each Wildcard Exemption May be Used Together

To explain further, a husband and wife may each use their $2,500 together, i.e., $5,000, to protect whatever personal property that they so choose.

For example, if a couple owns a boat valued at $5,000, then that asset can be protected in a Nebraska bankruptcy because each debtor can use their “wildcard” exemption toward the protection of that asset.

The usage of the wildcard exemption is quite flexible. They can be added together AND the exemption can normally be used to provide additional protection to other assets (that are protected by another exemption).

As an example, Nebraska allows individuals who use their vehicle to commute to and from work or use their vehicle during work to protect up to $2,400 (Neb. Rev. St. § 25-1556(4)).

Since the wildcard exemption is so flexible, you can add $2,500 (wildcard) to the $2,400 vehicle exemption to protect up to $4,900 of equity in the vehicle (in a one-debtor case).

In a joint Nebraska bankruptcy case, you can protect up to $7,400 ($5,000 + $2,400). In short, the Nebraska wildcard exemption is extremely useful in protecting personal property in a Nebraska bankruptcy proceeding.

Nebraska’s Bankruptcy Wildcard Exemption Protects a Variety of Assets

In addition to tangible assets, such as cars, furniture and other assets that you can touch and feel, the Nebraska wildcard exemption also protects intangible assets like bank accounts, contract rights, account receivables and other similar assets.

It is very common to use this bankruptcy exemption to protect bank balances, tax refunds and household goods and furnishings. In essence, this is the bankruptcy exemption in Nebraska that normally fills in the blanks when there is no other specific exemption that applies.

To be sure, there are limitations to this exemption, but bankruptcy attorneys in Omaha and elsewhere in Nebraska use this specific statutory exemption the most and for a good reason.

New and Improved Bankruptcy Exemptions Proposed in Nebraska

Yes, it’s true! It’s a rare event, but, as of January 16, 2014, Legislative Bills 962 and 963 of the 103rd Nebraska Legislature second session contains two bills introduced by Sen. Lydia Brasch that propose to dramatically improve what people can protect if they file bankruptcy and/or from a creditor taking certain assets from you after a judgment is issued outside of bankruptcy.

Here are the highlights:

Increases from $1,500 to $3,000 per person the protection for household furnishings;
Increases from $2,400 to $5,000 per person for tools of the trade, INCLUDING a vehicle. (Note: The current exemption for a vehicle is only applicable IF it is used for work.

The new exemption calls for exempting a vehicle no matter what it is used for.)
Increases from $2,500 to $5,000 per person for any other personal property. This is commonly referred to as the “wildcard” exemption.

What impact will the new bills have on bankruptcy in Nebraska?

Considerable. To begin with, an individual or couple who needs to file bankruptcy may be able to proceed under a Chapter 7 bankruptcy instead of the more protective and protracted Chapter 13 reorganization bankruptcy.

In many cases, people file a Chapter 13 bankruptcy to protect the equity in their assets but then are required to make payments to a Chapter 13 trustee for three to five years in exchange for the protection.

With the higher limits proposed under the new bills, there is much more leeway and safety in proceeding with a Chapter 7 bankruptcy while not having to worry about a Chapter 7 bankruptcy trustee taking your vehicle, furnishings and other personal property.

Another benefit will be potentially lower Chapter 13 monthly payments. In certain cases where having too much equity causes your Chapter 13 payments to be higher, the new exemption amounts would definitely help.

Although the proposed exemption increases are modest compared to other states (Iowa, for example, has a $7,000 per person exemption for a vehicle already), they would help keep bankruptcy payments more affordable.

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.