Bankruptcy - What is Exempt Property?

When individuals file bankruptcy under Chapter 7 they are allowed to keep all of their "exempt property." Exempt property is real or personal property that the law specifically allows individuals to keep when they file bankruptcy.

Exempt property laws differ from state to state, but usually include an individual's primary residence, motor vehicles (including motorcycles), household furnishings, clothing, jewelry, life insurance policies, retirement accounts and pensions, bank accounts, social security benefits, disability benefits, spousal and child support, tools of trade, etc.

The amount of an exemption in particular property may be unlimited or may be limited to a certain dollar value. For example, an unlimited exemption may provide that all clothing is exempt. A limited exemption may provide that up to $3,000 of jewelry is exempt.

Any property that is not exempt can, technically, be sold by the bankruptcy trustee to pay creditors. In reality, however, bankruptcy trustees are usually not interested in liquidating non-exempt assets of insignificant value, such as an old car worth $600 or normal household items.

In approximately 96% of consumer bankruptcy cases, all property is exempt. Therefore, the debtor retains all assets and there is no payment to creditors. All or most debts are completely forgiven or "discharged". If the debtor owes money on his home or motor vehicle and wants to keep these assets, he must "reaffirm" these debts and keep making regular payments or, alternatively, he must pay the creditor the fair market value of the property.