Figuring out exactly what property you’re legally entitled to keep if you file for bankruptcy takes some work, but it’s very important. it’s your responsibility—
and to your benefit—to claim all exemptions to which you’re entitled. if you don’t claim property as exempt, you could lose it unnecessarily to your creditors.
exempt property is the property you can keep during and after bankruptcy. nonexempt property is the property that the bankruptcy trustee is entitled to take and sell to pay your creditors. therefore, the more you can claim as exempt, the better off you are.
in Ch. 1, we explained that each state’s legislature produces a set of exemptions for use by people who are residents of that state. Fifteen states (and the district
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of Columbia) allow debtors to choose between their state’s exemptions or another set of exemptions created by Congress (called federal bankruptcy exemptions).
states that currently allow debtors this choice are ar- kansas, Connecticut, hawaii, Massachusetts, Michigan, Minnesota, new hampshire, new jersey, new Mexico, Pennsylvania, rhode island, texas, Vermont, washing- ton, and wisconsin. you have to choose one system or the other—you can’t mix and match some exemptions from one and some from the other. however, if you use one system when you first file your petition and later on decide that the other system would work better for you, you can amend schedule C—the form where you list your exemption claims—to change systems.
California has adopted its own unique exemption system. although California doesn’t allow debtors to use the federal exemptions, California offers two sets of state exemptions. with a few important exceptions, the alternative California exemptions are the same as the federal exemptions. as in the 15 states that have the federal bankruptcy exemptions, people filing for bankruptcy in California must choose one or the other set of California’s state exemptions.
You might be able to keep your nonexempt property. You won’t have to surrender a specific item of nonexempt property to the trustee if you pay the property’s value in cash, or if the trustee is willing to accept exempt property of roughly equal value instead. Also, the trustee might reject or abandon the item if it would be too costly or cumbersome to sell. In that case, you also get to keep it. So when we say that you have to give up property, remember that you still might be able to barter with the trustee to keep it.
Types of Exemptions
Both state and federal exemptions come in several basic flavors.
Exemptions to a Limited Amount
some exemptions protect the value of your ownership in a particular item only up to a set dollar limit. For instance, the new Mexico state exemptions allow you to keep $4,000 of equity in a motor vehicle. if you were filing for Chapter 7 bankruptcy in that state and using the state exemption list, you could keep your car if it was worth $4,000 or less. you could also keep the
car if selling it would not raise enough money to pay what you still owe on it and give you the full value of your $4,000 exemption. For example, if you own a car worth $20,000 but still owe $16,000 on it, selling it would raise $16,000 for the lender and $4,000 for you (thanks to the exemption). the trustee wouldn’t take the car because there would be nothing left over to pay your other creditors. instead, you would be allowed to keep it as long as you are—and remain—current on your payments.
however, if your equity in the car exceeded the $4,000 exemption, the trustee might sell the car to raise money for your other creditors. to continue our example, let’s say you owe only $10,000 on that car. selling the car for $20,000 would pay off the lender in full, pay your $4,000 exemption, and leave a portion of the remaining $6,000 (after the costs of sale are deducted) to be distributed to your other creditors. in this scenario, you are entitled to the full value of your exemption—
$4,000—but not to the car itself.
Exemptions Without Regard to Value
another type of exemption allows you to keep specified property items regardless of their value.
For instance, the utah state exemptions allow you to keep a refrigerator, freezer, microwave, stove, sewing machine, and carpets with no limit on their value. For comparison purposes, another utah state exemption places a $500 limit on “heirlooms, sofas, chairs, and related furnishings.” go figure.
Wildcard Exemptions
some states (and the federal exemption list) also provide a general-purpose exemption, called a wild- card exemption. this exemption gives you a dollar amount that you can apply to any type of property.
if you play poker, you undoubtedly have played a game where a particular card is designated a wildcard, which means you can use it as a queen of diamonds, a two of spades, or any other card you want to make the most of the other cards in your hand. the same principle applies here. For example, suppose you own a $3,000 boat in a state that doesn’t exempt boats but does have a wildcard of $5,000. you can take $3,000 of the wildcard and apply it to the boat, which means the boat will now be considered exempt. and if you have other nonexempt property, you can apply the remaining $2,000 to that property.
you can also use a wildcard exemption to increase an existing exemption. For example, if you have $5,000 worth of equity in your car but your state only allows you to exempt $1,500 of its value, you will likely lose the car. however, if your state has a $5,000 wildcard exemption, you could use the $1,500 motor vehicle exemption and $3,500 of the wildcard exemption to exempt your car entirely. and you’d still have $1,500 of the wildcard exemption to use on other nonexempt property.
Why State Exemptions Vary So Much
each state’s exemptions are unique. the property you can keep, therefore, varies considerably from state to state. why the differences? state exemptions are used not only for bankruptcy purposes but also to shelter property that otherwise could be taken by creditors who have obtained court judgments. the exemptions reflect the attitudes of state legislators about how much property, and which property, a debtor should be forced to part with when a victorious creditor collects on a judgment. these attitudes are rooted in local values and concerns. But in many cases there is another, more pressing, reason why state exemptions differ. some state legislatures have raised exemption levels in recent times, while other states last looked at their exemptions many decades ago. in states that don’t reconsider their exemptions very often, you can expect to find lower dollar amounts.
New Domicile Requirements for Using State Exemptions
Prior to the new bankruptcy law, filers used the exemptions of the state where they lived when they filed for bankruptcy. under the new rules, however, some filers will have to use the exemptions of the state where they used to live. Congress was concerned about people gaming the system by moving to states with liberal exemptions just to file for bankruptcy. as a result, it passed domicile requirements filers have to meet before they can use a state’s exemption system.
(as explained in Ch. 1, your domicile is where you make your permanent home—where you get mail, vote, pay taxes, and so on—even if you are temporarily living elsewhere due to work or military service.)
here are the new rules that apply to exemptions for everything but a home:
• if you have made your domicile in your current state for at least two years, you can use that state’s exemptions.
• if you have had your domicile in your current state for more than 91 days but less than two years, you must use the exemptions of the state where you were domiciled for the better part of the 180-day period immediately prior to the two- year period preceding your filing.
• if you have had your domicile in your current state for fewer than 91 days, you can either file in the state where you lived immediately before (as long as you lived there for at least 91 days) or wait until you have logged 91 days in your new home and file in your current state. once you figure out where you can file, you’ll need to use whatever exemptions are available to you according to the rules set out above.
• if the state you are filing in offers a choice between the state and federal bankruptcy exemptions, you can use the federal exemption list regardless of how long you’ve been living in the state.
• if these rules deprive you of the right to use any state’s exemptions, you can use the federal exemption list. For example, some states allow their exemptions to be used only by current state residents, which might leave former residents who haven’t lived in their new home state for at least two years without any available state exemptions.
(see, for example, In re Underwood, 342 B.r.
358 (n.d. Fla. 2006); In re Crandall, 346 B.r. 220 (M.d. Fla. 2006); and In re West, 352 B.r. 905 (M.d. Fla. 2006)). if you have recently returned to the u.s. after being domiciled in another country, and no state exemption system is available to you under these rules, you are also entitled to use the federal exemptions.
a longer domicile requirement applies to homestead exemptions: if you acquired a home in your current state within the 40 months before you file for bankruptcy (and you didn’t purchase it with the proceeds from selling another home in that state), your homestead exemption will be subject to a cap of $136,875, even if the state homestead exemption
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available to you is larger. For detailed information on homestead exemptions, see Ch. 4.
ExAMPLE 1: sammie jo lives in south Carolina from july 2006 until january 2008, when she gets lucky at a casino, moves to texas, and buys a car for $15,000. in March 2009, sammie jo files for bankruptcy in texas. her car is now worth $14,000.
Because sammie jo has been living in texas for only 14 months—not two years—she can’t use the texas exemption for cars, which can be up to $30,000, depending on the value of other personal property a filer claims as exempt. Because sammie jo filed in March 2009, she must use the exemptions of the state where she lived for most of the nine-month period ending two years before she filed, or March 2007. sammie jo lived in south Carolina for the six months prior to March 2007, so she must use the south Carolina exemptions. as it turns out, the south Carolina exemption for cars is only $1,200, which means that sammie jo will probably lose her car if she uses the south Carolina exemptions.
as it turns out, however, texas gives filers the option of using either its state exemptions or the federal bankruptcy exemptions. under the new law, the rules of the state where a person files determine whether the federal exemptions are available, even if that person has not lived in the state long enough to use its state exemptions. this means that sammie jo can use the federal exemptions instead of the south Carolina state exemptions. under the federal exemptions, sammie jo is entitled to exempt a motor vehicle worth up to $3,225—still not enough to cover her car. But wait. the federal exemptions also provide a wildcard of $1,075, plus $10,125 of unused homestead exemption. sammie jo doesn’t own her home, so she can add the entire wildcard of
$11,200 to her $3,225 vehicle exemption, for a total exemption of $14,425 she can apply to her car.
ExAMPLE 2: julia lived in north dakota for many years, until she moved to Florida on january 15, 2008. she files for bankruptcy in Florida on november 30, 2009. Because she has lived in Florida for slightly less than two years when she files, she must use the exemptions from the state where she lived for the better part of the 180-day period that ended two years before she filed—which is
north dakota. as it turns out, julia’s most valuable possession is a prepaid medical savings account with
$20,000 in it. while the account would be exempt under Florida law, north dakota has no exemption for this type of property. nor are the federal exemptions available in Florida. so the trustee will probably seize the medical savings account and use the money in it to pay julia’s creditors. had julia waited another month and a half to file, she would have been able to use Florida’s exemptions and keep her medical savings account.
These residency requirements may be declared unconstitutional. Some bankruptcy experts believe that using residency requirements to discourage bankruptcy filers from moving may be unconstitutional, because it burdens filers’ fundamental right to travel. Because this issue is sure to be raised early on by any attorney whose client would suffer financial harm due to these residency requirements, you should check for updates at www.nolo .com before relying on the information in this section. If you are interested in reading the leading case on this “right to travel” issue, see Shapiro v. Thompson, 394 U.S. 618 (1969), available at www.oyez.org/oyez/resource/case/351.
If You Are Married and Filing Jointly
if the federal bankruptcy exemptions are available in the state where you file and you decide to use them, you may double all of the exemptions if you are married and filing jointly. (see Ch. 6 for more on whether to file jointly.) this means that you and your spouse can each claim the full amount of each exemption. if you decide to use your state’s exemptions, you may be able to double some exemptions but not others. For instance, in the California exemption system 1 list, the $2,550 limit for motor vehicles may not be doubled, but the
$6,750 limit on tools of the trade may be doubled in some circumstances. in order for you to double an exemption for a single piece of property, title to the property must be in both of your names. in appendix 1, we’ve noted whether a court or state legislature has expressly allowed or prohibited doubling. if the chart doesn’t say one way or the other, it is probably safe to double. however, keep in mind that this area of the law changes rapidly—legislation or court decisions
issued after the publication date of this book will not be reflected in the chart. (see Ch. 10 for information on doing your own legal research; you can find the latest exemption laws at www.legalconsumer.com.)
Think Creatively About Exemptions
“Tools of the trade” is a common exemption category. The term used to mean hand tools, but now it refers more broadly to the things you need in order to do the job you rely on for support.
Here are some examples of property that could be considered tools of the trade in various fields:
• Art camera, scanner (artist)
• Car, truck, or van that is used for more than just commuting (sales manager, insurance adjuster, physician, firewood salesperson, traveling salesperson, real estate salesperson, mechanic)
• Cream separator, dairy cows, animal feed (farmer)
• Drills, saws (carpenter)
• Electric motor, lathe (mechanic)
• Guitar, acoustic amplifier, coronet, violin and bow, organ, speaker cabinet (musician)
• Hair dye, shampoo, cash register, furniture, dryer, fan, curler, magazine rack (barber, beauty parlor operator)
• Oven, mixer (baker)
• Personal computer, printer (insurance salesperson, lawyer, accountant)
• Photographic lens (photographer)
• Power chain saw (firewood salesperson)
• Sewing machine (tailor)
• Truck (logger, tire retreader, truck driver, farmer, electrician).
Review the tools of the trade exemption rules available to you carefully—you may be pleasantly surprised by what you can keep.