Understanding Bankruptcy and Homestead Exemptions

A common fear in filing for bankruptcy is that you will lose everything in exchange for discharging your debt. However, the reality is that even with Chapter 7, where assets get liquidated, very few filers end up losing anything. That’s thanks to federal and state homestead and other property exemptions.

This guide explains how exemptions work, and what can and can’t be protected depending on where you live.

Before we dive into this you should not make any assumptions about how exemptions will impact you in your state. Depending on where you live you can elect to use state exemptions or federal. The local practices of your bankruptcy court may be important as well.

You should absolutely confer with and use the services of a bankruptcy attorney to best understand which exemptions make the most sense for you and how items that might seem unprotected, can actually be protected.

How do bankruptcy exemptions work?

Exemptions work differently based on which type of bankruptcy you file and where you live.

Exemptions in Chapter 7

Chapter 7 bankruptcy is known as “straight bankruptcy” because it is the least complicated bankruptcy to file. In the limited Chapter 7 filings where there would be substantial assets in excess of liabilities, the court trustee oversees the sale of assets and the proceeds are used to repay the creditors and lenders that you owe. However, only nonexempt assets are eligible for sale.

Many assets qualify for an exemption, meaning that the court won’t touch them, and you get to keep them. People wrongly assume creditors will come after televisions, computers, beds, etc. Creditors don’t want your old used stuff and have no efficient method to deal with them.

Most exemptions, such as the homestead exemption, are based on the value of the property in question. Homes that fall below a certain value are exempt, while those above that value are not. But that is not the case in some states. In some states, the home is completely protected in bankruptcy.

Exemptions in Chapter 13

Chapter 13 bankruptcy is known as “wage earner’s bankruptcy” because the court arranges a 3- to 5-year repayment plan. You must make monthly payments according to an agreed schedule before you can receive a final bankruptcy discharge.

As such, your assets don’t need to qualify for an exemption so you can keep them. However, exemptions still come into play because they affect how much you end up paying. The court determines your monthly payments based on the value of your non-exempt property.

Thus, the more exemptions that you qualify for, the lower your Chapter 13 monthly payments will be.

Types of exemptions

Bankruptcy exemptions fall into groups. The groups for federal and state bankruptcy exemptions are largely the same. Most are straightforward and defined here. However, some have special rules that you can read more about below. In general, exemptions protect your property up to a certain value; if a value is not stipulated, then the property is fully protected.

• Homestead exemption – protects your primary residence
• Personal property – protects personal items, usually those which are either necessities or those which might have sentimental value
• Motor vehicle – protects your primary form of transportation
• Retirement accounts and pensions – protects the long-term savings you’ve generated for your future
• Public benefits – protects assistance benefits you receive, which often provide vital income
• Tools of the trade – protects items and property which are necessary for you to work effectively in an occupation
• Alimony and child support – protects the money you receive through court-ordered support, which may be a vital source of income
• Wages – protects income you earn (this is not protected under federal law, but is protected in most states)
• Insurance – protects insurance policies that you need to protect your family
• Wildcard – allows you to protect additional property that is valuable to you
• Miscellaneous – some states have other specific exemptions filed under miscellaneous

Rules for homestead exemptions

Homestead exemptions can be crucial because they may prevent the sale of your home in bankruptcy. This only applies to the real property that you use as your primary residence. Other real property, such as vacation homes or rental property, will not be protected.

Rules for equity limitations

In most cases, a homestead exemption will not protect the full value of the home. In most states, as well as under federal guidelines, it only protects a set amount of equity.

If you have more equity than what’s protected by the exemption, then your home would be sold if you file Chapter 7. You would receive the exemption amount back from the sale. Then the rest of the proceeds would be used to pay off the mortgage and pay your creditors.

For example, let’s say you own a home with a current market value of $150,000. You owe $100,000 on your mortgage. This means you have $50,000 worth of equity. If you live in Arizona where a homestead exemption covers equity up to $150,000, your home would not be sold. However, under federal exemptions which only protect up to $25,150 if you are filing individually, the home would be sold.

The good news is that the homestead exemption in most states will protect a sizeable amount of equity. In many states, as well as under federal rules, the equity amount doubles if you are married. So, in the example above, if you were married, then federal rules would protect the home because the equity limit would be $50,300.

This map shows the individual homestead exemption in each state, with a popup that details if there's an additional exemption amount for a married couple. The seven states that are checkered have an unlimited homestead exemption, meaning you can protect your home regardless of how high the value is. Two states (New Jersey and Pennsylvania) have no homestead exemption.

Additional rules

Be aware that are often additional rules that you must meet to qualify for this exemption. For example, you may need to reside in your home for a certain period to qualify.

Additionally, even if you use state homestead exemption rules that have no cap on how much equity you have, federal guidelines say you must live in the home at least 40 months to qualify for the unlimited protection. Otherwise, the equity is only protected up to $170,350.

Homestead exemption rules vary from state to state and can be complicated. This is another reason it’s highly beneficial to have a qualified bankruptcy attorney who is licensed in your state. They can help you navigate homestead rules, as well as other bankruptcy exemptions.

What is a wildcard exemption?

Wildcard exemptions exist to allow you to protect property that is meaningful to you. If you have an item that doesn’t fall under one of the specific groups of exemptions in your state, then you may be able to use the wildcard to protect it.

Not all states have a wildcard option available. Those that do always limit the wildcard to a certain dollar amount. The value of the item you want to keep must fall below that limit to use it.

For example, let’s say you have a grandfather clock that’s been in your family for generations. You live in Alabama where the wildcard exemption is $7,750. As long as the value of the clock was appraised below $7,750, then you could keep the clock.

Federal versus state exemptions

Both the federal government and individual states have specific exemptions. Most states require you to use their state exemptions when filing.

However, if you live in one of these places, you can choose whether you use the federal or state exemptions:

Alaska	Kentucky	New Jersey	Rhode Island
Arkansas	Massachusetts	New Mexico	Texas
Connecticut	Michigan	New York	Vermont
District of Columbia	Minnesota	Oregon	Washington
Hawaii	New Hampshire	Pennsylvania	Wisconsin

You can’t mix and match; you must choose one or the other. In California, you must use state exemptions, but there are two sets to choose from.

Federal bankruptcy exemptions

Federal exemptions are enacted by Congress and updated every three years. The current exemptions were set on January 3rd, 2022.^[1]

For a comprehensive understanding of federal bankruptcy exemptions and what you can claim, you should read the actual law here. If you are married and filing jointly, all federal exemptions that are limited by a monetary amount can be doubled. If there is no amount listed, then the entire property is exempt.

If you're having trouble clearly understanding the federal exemptions and how they might apply to you, you should contact a seasoned attorney that specializes in bankruptcy law.