What Can You Keep if You Go Bankrupt?

By Joseph Nicholson

Contrary to what some might think, you don't lose everything in bankruptcy. Not even if you file for Chapter 7 liquidation. The purpose of bankruptcy is not to ruin you, but to help you get a fresh start. For this reason, many basic property items are exempt from liquidation or creditors' claims in bankruptcy. Each state, however, has its own exemptions, and may or may not allow use of the standard federal exemptions. The value of each exemption was updated for inflation in 2007 and every three years subsequent. Check the bankruptcy exemptions in your state before filing.

Homestead

Usually the largest and most important bankruptcy exemption is for a homestead. This is a piece of real property that the debtor uses as her primary place of residence. In a few states, the amount of the homestead exemption is unlimited. In most, it is set at a particular dollar value (which varies widely), while a few have acreage restrictions. The homestead exemption prevents a debtor from being left homeless by either allowing him to keep his current home or protecting enough equity that he can find other accommodations. As of 2009, the federal homestead exemption is $20,200, of which any unused portion up to $10,125 can be used for any other property.

Insurance and Pensions

Most insurance policy benefits or proceeds are protected from bankruptcy. If the debtor is dependent on the payments from an insurance policy taken out on someone other than himself, these are entirely exempt under the federal rules. Except for credit insurance, unmatured policies in his own name are also exempt. All tax exempt retirement accounts, including 401k, 403b, profit-sharing plans, SEP, simple IRAs and and defined-benefit plans, are exempt under the federal and most state allowances. The federal exemption for IRAs and Roth IRAs in 2009 is $1,095,000 per person.

Public Benefits

Another important property exemption in bankruptcy is public benefits. Under the federal bankruptcy code, this includes all Social Security, disability, unemployment, veteran's benefits and crime victim compensation. State exemptions are similar, but vary. Most systems, including the federal code, exempt child support and alimony awarded in a divorce or separation if the debtor is dependent on them.

Automobile and Wages

The exemption for an automobile is another important bankruptcy exemption. The federal exemption is $3,225, and state allowances vary. This is important because most people are dependent on their vehicles for transportation to and from work. Like the homestead exemption, the automobile allowance might not prevent a debtor from losing his vehicle, but it will help him obtain some form of reliable transportation. There is no federal exemption for wages, but many states do make such an allowance. Typically, 75 percent of any earned but unpaid wages at the time of filing are exempt.

Other Personal Property

The greatest variation among state and federal bankruptcy exemptions occurs in the category of personal property. Some states include unique exemptions, such as for firearms, firewood, Bibles and school tuition, that are not part of the federal system. The federal exemptions allow for up to $10,775 in household goods, appliances, furnishings, clothing, books, musical instruments, animals, and crops--but not more than $525 for a single item. All health aids are exempt, as are recoveries for the wrongful death of a person on whom the debtor depended. Personal injury judgments are exempt up to $20,200, and jewelry up to $1,350. Tools and implements necessary for the debtor's employment are exempt in varying amounts (up to $2,025 in the federal code). The federal rules, and many state laws, allow for a wild card exemption that can be applied to any property.

About the Author

Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.