What is a Bankruptcy Exemption?

Bankruptcy exemptions are critical to individual bankruptcy filers.  Exemptions give debtors in bankruptcy cases the ability to shield certain of their assets from the reach of their creditors.  A fresh start would not be very meaningful if it meant that you had to turn over every stitch on your back and every cent you have.  The United States Bankruptcy Code permits states to provide their own set of exemptions to debtors or to allow debtors to use the exemptions contained in section 522(d) of the Bankruptcy Code.  Some states, including the Commonwealth of Pennsylvania, allow debtors to select between the federal exemption scheme and the exemptions provided under state law.  The Pennsylvania exemptions are scattered through numerous statutes and still others are “common law exemptions,” contained within the written opinions of state courts of law.  Debtors should consult with a bankruptcy lawyer to determine which set of exemptions would protect more assets.

Generally speaking, the federal exemptions permit a debtor to exempt $21,625 in property that the debtor or a dependent of the debtor uses as a residence.  If debtors are married, filing a joint bankruptcy and own their home together, they can protect even more equity by applying both exemptions to their property.  In the case of a married couple where only one spouse has significant debt but both spouses own the home, it may make sense to apply the Pennsylvania exemptions.  In Pennsylvania, married couples who own a home usually hold it as “tenants by the entireties.”  The couple’s interest in property is not divisible and, therefore, creditors of only one spouse cannot resort to that property for payment.

Under the federal exemptions, debtors may exempt $3,450 of their interest in a vehicle.  In a simple example, if you own a vehicle that is worth $10,000 but, upon which you still owe $8,000, you may exempt your $2,000 interest in the vehicle in a bankruptcy case and continue paying on the $8,000 loan to keep the vehicle.  The federal exemptions also permit a debtor to exempt $1,450 of jewelry, $11,525 in household goods, furnishings, wearing apparel, appliances, books, animals, crops or musical instruments, $2,175 in “tools of the trade” of a debtor and most life insurance and retirement assets.  Additionally, the federal exemptions allow for  a “wild card” exemption of $1,150 in any property, which is increased up to $10,825 by any unused homestead exemption.  Thus, if a debtor does not need to exempt equity in a home, that debtor has more flexibility to exempt other property through the use of the wild card exemption.

Knowing how your exemptions work is a prerequisite to getting a meaningful fresh start in a bankruptcy case.  If you have questions about bankruptcy exemptions, you should consult with a bankruptcy attorney for a free consultation.  To find out how, call (412) 925-8194 now.

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