Federal bankruptcy exemptions are laws put in place to protect a debtor’s property in bankruptcy. When a debtor files for bankruptcy, their exempt property can’t be sold to pay off their debts.
What property federal bankruptcy exemptions protect varies depending on the types of assets the debtor has and the specific circumstances of their bankruptcy case.
Every three years, federal bankruptcy exemption totals are adjusted for inflation – they will increase again in 2025. Bankruptcy exemptions also exist under some state laws, and the amounts vary from state to state. Debtors can use either federal exemptions or state exemptions, but not both.
What Is Bankruptcy?
Bankruptcy is a legal process that allows an individual or a business that cannot pay their debts to either restructure the debts or have them forgiven. Federal law governs bankruptcy in the United States.
There are several types of bankruptcy cases that an individual or a business can file for, depending on their specific needs and financial situation.
When a party files for bankruptcy, they typically seek relief from creditors and a fresh start financially. Bankruptcy provides a way to reorganize their debts and come up with a plan to repay them over time, or it allows their debts to be forgiven entirely.
Types of Bankruptcy Cases
There are several types of bankruptcy that individuals and businesses can file for in the United States. They are:
- Chapter 7: Also known as "liquidation" bankruptcy, Chapter 7 allows bankruptcy filers to sell nonexempt assets to pay off their debts. It is typically used by those who do not have the ability to pay their debts and have little to no assets.
- Chapter 9: Covers municipalities and allows them to earn protection from creditors while they develop a plan for adjusting their debt.
- Chapter 11: Also known as "reorganization" bankruptcy, Chapter 11 is used by businesses that need to restructure debts while continuing to operate. It allows businesses to create a plan to repay creditors over time.
- Chapter 12: Chapter 12 was designed for family farmers and fishermen. It allows them to reorganize their debts and create a plan to repay creditors over time.
- Chapter 13: Also known as "wage earners" bankruptcy, allows individuals to reorganize their debts and create a plan to repay their creditors over a period of years. It is typically used by individuals who have a regular income and want to keep some assets, such as a home or car.
- Chapter 15: The newest type of bankruptcy allows individuals and businesses to file bankruptcy in the U.S. while having assets and debts in other countries.
What Do Bankruptcy Exemptions Protect?
The U.S. Bankruptcy Code has federal bankruptcy exemption laws that allow a party filing for bankruptcy to protect certain assets from being sold to pay off their debts. These exemptions allow debtors to keep some assets and financial resources, which, in turn, helps them rebuild their financial lives after bankruptcy.
Some assets protected by federal bankruptcy exemptions include:
- Equity in real estate.
- Personal property such as household goods, clothing and tools of the trade, like musical instruments.
- Retirement accounts such as 401Ks, IRAs and Roth IRAs.
- Life insurance policies that have cash value.
- Other income sources, such as alimony and child support.
What federal bankruptcy exemptions protect will vary depending on the assets the debtor has and on the specific circumstances of their bankruptcy case. Not all assets are exempt, and some that are may still be subject to creditor claims or liens.
Differences Between Federal and State Bankruptcy Exemptions
In the United States, both federal and state laws determine bankruptcy exemptions. Bankruptcy filers can use either federal exemptions or state exemptions, but not both. There are some differences between federal and state bankruptcy exemptions:
- Federal bankruptcy exemptions: Available to all bankruptcy filers, regardless of their state of residence. Federal bankruptcy exemptions cover certain types of property, such as personal property, wages and some equity in real estate.
- State bankruptcy exemptions: Vary from state to state and allow residents to protect specific types of property not covered through federal exemptions. Some states have their own specific exemptions for real estate, motor vehicles and personal property; others allow residents to choose between state exemptions and federal exemptions.
| Alaska | Michigan | Pennsylvania |
| Arkansas | Minnesota | Rhode Island |
| Connecticut | New Jersey | Texas |
| District of Columbia | New Hampshire | Vermont |
| Hawaii | New Mexico | Washington |
| Kentucky | New York | Wisconsin |
| Massachusetts | Oregon |
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 bankruptcy and Chapter 13 bankruptcy are the most common types of bankruptcy cases under U.S. Bankruptcy Code. Below are the differences between the two.
| Chapter 7 | Chapter 13 | |
| Who Can File | Individuals | Individuals and Sole Proprietors |
| Eligibility Factors | To qualify for Chapter 7 bankruptcy, a debtor must pass a means test, which compares their income to their state’s median income. If their income is below the state average, they may be eligible to file Chapter 7 bankruptcy. If not, they may have to file for Chapter 13 bankruptcy | To qualify for Chapter 13 bankruptcy, a debtor must have regular income and their debts must fall below certain limits. A debtor may not have unsecured debt of more than $465,275 or secured debt of more than $1,395,875. |
| How Long the Bankruptcy Process Takes | Chapter 7 bankruptcy is a relatively quick process that typically takes three to six months from start to finish. It involves liquidating nonexempt assets to pay off debt. Any remaining debts are generally discharged. | Chapter 13 bankruptcy involves creating a repayment plan to pay off an individual's debt over a three to five year period. A debtor will make regular payments to a bankruptcy trustee, who then distributes the funds to creditors. |
| Debts Discharged | In Chapter 7 bankruptcy, most unsecured debts, such as credit card and medical debt, are typically discharged or eliminated. Some types of debts, such as certain student loans and most taxes, are not dischargeable. | In Chapter 13 bankruptcy, the debtor will be required to pay back a portion of their debts, but the amount they’ll have to pay may be reduced based on their income and additional factors. At the end of the repayment period, any remaining dischargeable debts will be eliminated. |
| Effects on a Debtor's Credit | Negative effect on credit, but it is generally easier to rebuild credit after a Chapter 7 bankruptcy, as the process is quicker and involves a complete discharge of debts. | Negative effect on credit. It may take longer to rebuild credit after a Chapter 13 bankruptcy because the debtor makes payments over a longer period of time. |
Federal Bankruptcy Homestead Exemption
The Federal Bankruptcy Homestead Exemption is a provision under U.S. bankruptcy law that allows debtors to protect some or all of the equity in their home from being sold to pay off creditors during bankruptcy proceedings.
Under the Federal Bankruptcy Homestead Exemption, for cases filed between April 1, 2022, and March 31, 2025, the exemption amount is $27,900. On April 1, 2025, there will be another adjustment for inflation. A married couple filing bankruptcy jointly can double their homestead exemption amount if they have a shared property interest.
Retirement Account Exemptions Under U.S. Bankruptcy Code
Debtors may exempt certain types of property from bankruptcy. This means that they can keep these assets, even though they are part of the bankruptcy estate – they will not be used to pay off creditors.
The types of retirement accounts that may be exempt are traditional IRAs, Roth IRAs and 401Ks. The exact amount that a debtor can exempt depends on the specific type of retirement account they have.
Limits on Retirement Account Amounts
In 2022, IRAs and Roth IRAs are protected only if a debtor holds $1,512,350 or less across all of their retirement plans. This is an overall exemption, not an exemption for each plan.
Debtors who have more than that amount in their plans can transfer the funds to a bankruptcy trustee, who will then use it to pay creditors. This exemption amount goes up every three years, according to federal law.
Removing Money From a Retirement Account
If a debtor takes money out of a retirement account, it will be considered income in a bankruptcy case. If they file under Chapter 7, this may make them ineligible under the means test. If they have passed the means test, the funds may become accessible to the bankruptcy trustee if they are not needed for basic necessities.
If a debtor files under Chapter 13, withdrawn retirement account funds may increase the monthly payments of their repayment plan, as the funds will be considered disposable income that the debtor can put toward payment of their unsecured debts.
In short, debtors may want to refrain from withdrawing retirement account funds until they’ve completed the bankruptcy process.
Additional Exemption Amounts for Other Property Types
Per U.S. Bankruptcy Code 11 U.S.C. Section 104, exemption amounts are automatically adjusted for inflation every three years and rounded to the nearest $25. The last adjustments took effect on April 1, 2022 and will change again on April 1, 2025.
Property Type | Exemption Amount |
|---|---|
| Motor Vehicle | $4,450 |
| Household Goods (Per Item Limit) | $700 |
| Household Goods (Aggregate Limit) | $14,875 |
| Jewelry | $1,875 |
| Tools of the Trade | $2,800 |
| Unmatured Life Insurance | $4,875 |
| Personal Injury Claims | $27,900 |
What Is a Wildcard Bankruptcy Exemption?
A wildcard bankruptcy exemption allows the exemption of personal property that is not otherwise exempt under state or federal law. This type of exemption is useful for those whose personal property or other assets are not covered by other exemptions.
A wildcard bankruptcy exemption is designed to give debtors more flexibility in protecting their assets.
Wildcard Exemption Limits
The current federal wildcard exemption is $1,475, plus a maximum $13,950 of any portion that remains unused from the Federal Bankruptcy Homestead Exemption – a married couple filing bankruptcy can double this amount.
Residents of the states listed above can use federal wildcard bankruptcy exemptions instead of their state's exemptions. If they are in other states, they cannot.
Wildcard exemptions vary from state to state. Some states allow their state wildcard exemption to be combined with other exemptions, such as a personal property or homestead exemption. Not all states have wildcard exemptions, and exemption amounts vary depending upon the type of bankruptcy filing a debtor pursues.
References
- USCourts.gov: Bankruptcy
- National Foundation for Credit Counseling: The Different Chapters of Bankruptcy Explained
- Cornell Law: 11 U.S. Code Section 522 - Exemptions
- USCourts.gov: Best Practices: Following the Bankruptcy Threshold Adjustment and Technical Corrections Act
- National Foundation for Credit Counseling: April 1 Increase of Federal Bankruptcy Exemptions, Other Dollar Amounts
- FindLaw: U.S. Code - Unannotated Title 11 Bankruptcy Section 104. Adjustment of Dollar Amounts
- Justia Law: The Wildcard Exemption in Bankruptcy
Writer Bio
Michelle Nati is an associate editor and writer who has reported on legal, criminal and government news for PasadenaNow.com and Complex Media. She holds a B.A. in Communications and English from Niagara University.