What are Bankruptcy Exemptions?

Bankruptcy exemptions are the amounts and assets that a person is entitled to keep when filing for personal bankruptcy. These allowances are provided at the federal and state level. The purpose of the exemptions is to ensure that the individual is able to maintain a basic standard of living, so that they can remain self sustaining.

At the federal level in the United States, the government provides the following basic exemptions.

1. The debtor is entitled to keep up to $20,200 US Dollars (USD) in equity in their home. Any equity above this must be paid out to the creditors. They may also keep a home that is valued at $20,200 USD or less.
2. A life insurance policy with a value, in accrued dividends or interest of $9,850 USD.
3. Up to $475 USD per item in any household goods, up to a total of $9,850 USD. Household goods include furniture, appliances, clothing, etc.
4. Up to $1,225 USD worth of jewelry.
5. A motor vehicle valued at $3,225 USD or less.
6. Any personal injury compensation payment up to $18,450 USD.
7. Tools of trade, such as books and equipment up to $1,850 USD.
8. A wild card, which covers up to $925 USD of any type of property.
9. If there is an unused portion of homestead up to $10,125 USD, it can be applied to any property.

Each state has their own list of bankruptcy exemptions, which are used in addition to the federal values. The bankruptcy exemptions that you may use are based on which state you lived in for the two years prior to the bankruptcy. If you lived in multiple states during this time, the state where you spend the majority of your time is the one that is used.

At the federal level, certain types of retirement accounts are covered under bankruptcy exemptions. Employee contributions to Employee Retirement Income Security Act (ERISA) qualified retirement plans, deferred compensation plans, tax deferred annuities and health insurance plans are all exempt.

The only other funds covered under bankruptcy exemptions are educational retirement accounts or qualified state tuition programs. The funds must have been deposited into the account at least 365 days before bankruptcy filing. The amounts deposited must fall within the limits provided in the internal revenue code and benefit a child or grandchild.

The allowances provided are designed to allow for a minimum standard of living, and apply regardless of the chapter that the debtor is filing for bankruptcy under. The further north a state is located, the higher the bankruptcy exemptions tend to be. This adjustment is based on the need to acquire more clothing and equipment to maintain mobility during the winter so that the debtor can continue to work.