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  1. Bankruptcy Glossary
  2. Exemptions

What are Exemptions?

The goal of bankruptcy is to allow debtors to have a fresh financial start. Bankruptcy laws were created to allow debtors to retain a reasonable amount of their assets to make this possible. Bankruptcy exemptions are a list of all the assets, personal items and goods that can not be liquidated in Chapter 7 Bankruptcy or sold in Chapter 13 Bankruptcy to repay creditors.

The types of exemptions allowed in a bankruptcy proceeding is determined by federal and state statutes and varies by state. Some states allow the filer to choose to use either the state or federal exemptions while other states do not allow the federal exemptions to be used. Federal and state exemptions can not both be used. It is important to note that changes in bankruptcy law under the BAPCPA in 2005, requires a debtor who moves from one state to another within 2 years of filing the bankruptcy case to use exemptions from where the debtor resided for the majority of the 180 day period before the 2 years before they filed bankruptcy [§ 522(b)(3)]. Debtors who become ineligible for any exemption under the new bankruptcy code changes may use the federal exemptions. Changes in residency laws were made to eliminate the opportunity for filers to move to a new state which had more generous exemptions and immediately file bankruptcy.

Chapter 7 Bankruptcy liquidates a filer's assets and uses the income to repay creditors. Some Chapter 7 Bankruptcy filers do not have assets to liquidate, but if a filer does have property, the bankruptcy laws allow them to protect or "exempt" certain assets.

Whether a filer is filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy the most common types of assets protected in each state include: the filer's primary residence, tools of the trade, a vehicle, pensions and public benefits and work equipment. It is important to talk to a bankruptcy lawyer for information about the specific types of exemptions allowed in each state and whether or not it is best to use the state or federal exemptions. A bankruptcy attorney can also help a filer complete Schedule C which is the bankruptcy form which outlines the filer's property which they claim should be exempt in the bankruptcy proceedings.