Bankruptcy
Exempt Property
Exempt property summary:
Exempt property is property that you're allowed to keep during a bankruptcy.
Each state has its own rules for exempt property.
Non-exempt property can be sold to pay off your creditors.
Exempt Property Definition and Meaning
During a Chapter 7 bankruptcy liquidation, your assets are sold to pay off creditors, after which you get to move forward with a clean slate. Exempt property is property you get to keep after filing bankruptcy. Each state has its own rules for determining which assets are exempt from the bankruptcy process and which are not. There is also a federal list, and some states let you choose which list you use.
Comprehensive Breakdown of Exempt Property
The purpose of filing for bankruptcy is to erase your debt to the greatest extent possible and get a fresh financial start. Personal bankruptcies come in two varieties—Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy is a liquidation, which means a trustee will be appointed to sell your non-exempt assets and direct the proceeds to your creditors. There are certain debts that cannot be discharged in a Chapter 7 bankruptcy, but the overall purpose is to be fair to your creditors while allowing you to move forward with a debt-free slate.
Chapter 7 bankruptcy is not designed to take away every single possession you own. That's why each state maintains a list of assets that are considered exempt property in these proceedings. Put another way, exempt property is excluded from the bankruptcy process.
If you're thinking of filing for bankruptcy, your attorney can explain which assets of yours are considered exempt property and which are not. This should help you choose between Chapter 7 and Chapter 13, or you may prefer alternative solutions that allow you to keep more of your assets.
Examples of Exempt Property
Exempt property typically entails assets you need to function. Selling your car in a Chapter 7 bankruptcy, for example, could render you unable to get to work. And if you can't work and earn money, you may be likely to end up back in debt after starting over.
That wouldn't make sense. For this reason, a modest primary vehicle is usually considered exempt property in a bankruptcy proceeding.
Similarly, say you work in construction and own tools. Surrendering those tools to pay off your creditors could leave you unable to work. So you may find that you're able to keep all or most of your tools if they're essential to doing your job.
Types of Exempt Property
Each state makes its own rules when it comes to exempt property. Some examples of property that someone going through bankruptcy may be able to keep include:
Some home equity
A car up to a certain value
Household goods, appliances, and furniture
Retirement account funds
Alimony and child support
Life insurance
Pensions
Trade tools up to a certain value
However, you may not be able to keep:
A second home
A second car
Cash savings
Collectibles of value
Exempt Property FAQs
Is debt relief the same as bankruptcy?
Debt relief is similar to bankruptcy because it allows you to satisfy unsecured debt for less than the amount owed. However, there are differences.
Bankruptcy is a matter of public record. Debt settlement is a private process. Chapter 7 bankruptcy typically takes a few months, while debt relief usually takes two to four years. Chapter 13 bankruptcy takes three to five years. Debt relief and bankruptcy are similar in some ways. They can both result in you paying less than the full amount you owe.
However, note that about half of Chapter 13 bankruptcies result in full repayment, plus bankruptcy and attorney fees. That means those people might have paid less if they had not filed for bankruptcy. So if you don't qualify for Chapter 7 or you don't want to lose assets, debt relief might help you more than Chapter 13.
What’s worse for credit scores, debt settlement or bankruptcy?
Expect either solution to drop your score by 100 to 200 points. The exact drop depends on what your credit score is before attempting a debt settlement or bankruptcy. For many consumers, the missed payments, collections and other serious delinquencies leading up to a bankruptcy filing or a debt settlement do much of the damage. Your ability to bounce back depends on how you manage your payments and use credit in the future, and that should be easier once your life becomes more affordable.
What is the difference between credit counseling, debt settlement, and bankruptcy?
Credit counseling can help you learn to budget and stop overspending. Counselors can enroll you in a debt management plan where they typically lower your interest rates and set up a payment schedule to simplify debt repayment and make it more affordable.
Debt settlement means convincing your creditors to accept less than you owe as payment in full. They may be willing to do so if you cannot afford to repay the full amount.
Bankruptcy is a court-ordered plan in which you either surrender assets or pay into a plan to discharge some or all of your debts.
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