Chapter 7 Section C Exemption Laws

by John Stevens J.D.
Bankruptcy filers should exempt as much property as possible from the court’s reach.

Bankruptcy filers should exempt as much property as possible from the court’s reach.

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One of the primary concerns for those considering filing for Chapter 7 bankruptcy is whether or not they will lose their property. The answer depends on the type of property the person owns, the value of that property, and whether the property is exempt from the court’s reach under the applicable exemption law.

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About Chapter 7 Bankruptcy

Chapter 7 bankruptcy is perhaps the most common type of bankruptcy used by individuals. A person filing under Chapter 7 must disclose all assets and debts to the court’s trustee. One of the responsibilities of a Chapter 7 bankruptcy trustee is to determine whether the bankruptcy debtor owns any property the trustee can take. If so, the trustee will take the property, sell it, and distribute the proceeds from the sale to the debtor’s creditors. Most remaining debts are eliminated at the conclusion of the bankruptcy process.

Schedule C Exemptions

Federal and state bankruptcy laws exempt certain property from the trustee’s reach. Some exemptions are for an unlimited about of money, meaning that the trustee cannot take these items no matter how much they are worth. Other exemptions exclude only a certain amount of money from the trustee’s reach. For example, an exemption for a home may only exclude $75,000 of equity from the trustee’s reach, meaning that the trustee can take the house, sell it, and keep any amount of equity greater than the $75,000 exemption amount. Debtors must list their property in the bankruptcy paperwork. Debtors then tell the trustee which exemptions the debtors are claiming on a page of the bankruptcy paperwork, called Schedule C.

Federal Bankruptcy Exemptions

Federal exemptions are generally more limited than exemptions allowed under state laws. Residents of only a few states are allowed to use federal exemptions. These residents must choose between using either the federal exemptions or the state exemptions. Federal exemptions include government benefits, such as money received from public assistance, Social Security, veterans benefits and unemployment compensation. Disability, alimony and child support money, and life insurance process also fall within the federal exemption system. Retirement benefits are also protected, to the extent the bankruptcy filer needs them for reasonable expenses. Federal exemptions include most items of personal property, including animals. Finally, the federal bankruptcy exemption system provides an exemption for real estate. Wages do not fall within the federal exemption system.

State Bankruptcy Exemptions

State bankruptcy exemptions generally offer greater protection than federal exemptions. The most significant difference between federal and state exemptions is the amount of money exempt from the trustee’s reach. States often include items that are not exempt under the federal system. For example, some states provide an exemption for health aids, burial plots, and money the debtor has earned but has not yet received. Some states, such as California, have more than one state exemption system. As with the federal system, state exemptions usually apply to retirement benefits, real estate and personal property. Some states have some unique exemptions. For example, a Bible is exempt in Virginia; in California, money held in a prisoner’s trust account falls within an exemption.