When you file for chapter 7 bankruptcy, you put your financial affairs into the hands of a federal court and a court-appointed trustee. The job of the bankruptcy trustee is to seize and sell your property to compensate your creditors. While bankruptcy law protects some of your assets, other property is considered non-exempt and is subject to seizure and liquidation.
Exemptions State by State
Federal and state laws cover exempt property in bankruptcy. Some states allow you to choose from either the federal or state lists of exemptions. Others require that you use the state schedule, but no state allows you to combine exemption limits from both federal and state laws. You can choose federal exemptions, as of 2013, in Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin. Under both state and federal laws, exemptions cover homes, land, cars, personal property, cash, benefits, furniture, pensions, antiques, art, jewelry, and tools of the trade. Property that is not included in the federal or state exemptions is considered non-exempt.
The Federal Exemptions
The federal schedule, as of April 1, 2013, allows a $3,675 exemption for a motor vehicle. If your car's market value is more than $3,675, the vehicle is not exempt. The trustee can seize the car, sell it and return at most $3,675 of the proceeds to you. If your car is worth less than the exemption amount, you can keep it. Federal exemptions also include $12,250 of aggregate value in household goods such as furniture and appliances with up to $575 for any single item, as well as $2,300 for tools of trade that you need to earn a living, and $1,550 in jewelry.
A certain amount of your homestead, or principle residence, is exempt under state and federal laws. The federal homestead exemption, as of April 1, 2013, is $22,975. The homestead exemption applies to the equity you have in your home, not the home's market value. This means that if you have a $200,000 home with a $150,000 mortgage balance, the homestead exemption applies to the $50,000 worth of equity available. If the exemption amount is $50,000 or more, you can keep the home. If your homestead exemption is only $25,000, then only that amount of your equity is protected. Either the trustee will force a sale of the home, or you will have to increase the equity by renegotiating the mortgage or by some other arrangement.
State Homestead Exemptions
State exemptions may be lower or higher than the federal exemption. Florida, for example, allows you to completely exempt your homestead, regardless of how much equity you have in the home or how much the property is worth. In Alabama, which requires that debtors use state exemptions, the exemption limit for property is only $5,000 -- and the property may not exceed 160 acres in size. For a married couple filing jointly, however, Alabama allows debtors to double the exemption amount.
Chapter 7 petitioners usually lose second cars, vacation homes, expensive collections or artwork, cash in the bank above a specified amount, and investments. Qualified retirement accounts such as IRAs are protected up to $1,245,475. Some states and federal law allow a limited "wildcard" exemption that you can apply to any property you choose. Federal law allows a $1,225 wildcard exemption, plus any unused portion of the homestead exemption up to $12,250. These amounts are for single filers; if you are married, filing jointly, some states as well as federal law doubles the exemption amount.