Property & Exemptions: Protect What You Own in Bankruptcy

Exemptions are laws that protect your property during bankruptcy. Over 95% of Chapter 7 filers keep everything they own. You don’t have to lose your home, car, or belongings to get debt relief. After discharge, you’ll be in a better position to rebuild credit and even buy a house.

Understanding how to protect your property is key. Bankruptcy exemptions exist to give you a real fresh start. You need your belongings to live and work.

How Bankruptcy Exemptions Work

Bankruptcy exemptions determine what you can keep when you file Chapter 7. These legal protections cover essential items like your home, vehicle, clothes, and household goods. Most people who file bankruptcy lose nothing.

Each state sets its own exemption amounts. Some states let you choose between state or federal exemptions. The right exemptions depend on where you live and what you own.

You must list all your property on your bankruptcy forms. Then you claim exemptions to protect each item. Your equity in property matters more than the total value.

What Equity Means

Equity is what you truly own in an asset. Calculate it by subtracting what you owe from current value. If your car is worth $10,000 and you owe $8,000, your equity is $2,000.

Exemptions protect your equity, not the full property value. Most people have little equity in major assets. That’s why they keep everything in bankruptcy.

Protecting Your Home

The homestead exemption protects equity in your primary residence. Amounts vary widely by state. Some states offer unlimited protection. Others provide modest coverage.

You can keep your house in Chapter 7 if two conditions are met. First, your equity must fall within your state’s homestead exemption. Second, you must stay current on mortgage payments.

If you’re behind on mortgage payments, Chapter 13 offers better options. You can catch up through a repayment plan. Speak with a bankruptcy attorney for free to explore your choices.

Homestead Exemption Amounts

California offers two exemption systems with different homestead amounts. Florida and Texas provide generous unlimited homestead protection. Arizona protects up to $250,000 in home equity.

New York’s homestead exemption varies by county. Illinois increased its exemptions starting in 2026. Check your state’s current exemption amounts before filing.

Keeping Your Vehicle

Motor vehicle exemptions protect cars, trucks, and motorcycles. Most states protect between $3,000 and $15,000 in vehicle equity. Some states protect more if you have a disability.

You can keep your car if your equity doesn’t exceed the exemption. You must also stay current on any car loan payments. Falling behind puts your vehicle at risk.

States without specific vehicle exemptions often offer wildcard protection. You can apply wildcard exemptions to any property, including vehicles.

Special Vehicle Considerations

Credit unions handle vehicle loans differently than banks. Cross-collateralization can complicate keeping your car. Your auto loan might secure other debts like credit cards.

Move any accounts away from credit unions before filing. Credit unions can freeze accounts or exercise set-off rights. They may even revoke your membership after bankruptcy.

Protecting Bank Accounts and Cash

You can keep your checking account during Chapter 7 bankruptcy. Exemptions protect the money in your account. The amount you can protect depends on state law.

Timing matters when filing bankruptcy. Recent deposits might receive different treatment. Money from exempt sources like Social Security gets extra protection.

If you owe money to your bank, open a new account elsewhere. Banks can offset what you owe against your account balance. Switch direct deposits to the new account before filing.

Retirement Accounts and Benefits

Retirement accounts receive strong protection in bankruptcy. 401(k) plans are almost always fully exempt. IRAs are protected up to specific federal limits.

Don’t withdraw retirement money to pay debts before filing. You’ll lose bankruptcy protection and face taxes and penalties. Keep retirement assets where they are.

Social Security benefits, disability payments, and veterans benefits are fully protected. These funds remain exempt even after depositing into your bank account.

Personal Property Exemptions

Personal property exemptions cover household goods, clothing, and everyday items. Most states protect necessary items with reasonable value. Jewelry, electronics, and furniture typically have specific limits.

Wildcard exemptions give you flexibility. Apply them to any property you choose. Use wildcard protection for items that exceed other exemption limits.

Tools of your trade receive separate protection. You can keep equipment needed for work. Exemption amounts vary by state.

Non-Exempt Property

Property that exceeds exemption limits is considered non-exempt. The bankruptcy trustee can sell non-exempt assets. Proceeds go to pay your creditors.

You have options if you have non-exempt equity. Negotiate with the trustee to buy back the item. Convert your case to Chapter 13. Dispute the trustee’s property valuation.

Most people don’t lose anything because exemptions are generous. The trustee only sells property if it generates meaningful value. Small amounts of non-exempt equity usually don’t matter.

What Happens to Property After Filing

Property you acquire after filing usually isn’t part of your case. Your bankruptcy estate includes only what you owned on the filing date. Post-filing income and property belong to you.

Three exceptions exist to this rule. Tax refunds for pre-filing years belong to the estate. Inheritances you receive within 180 days are included. Property settlements from divorce may be included.

The trustee may ask you to amend your exemptions. New information sometimes requires updated schedules. Respond promptly to trustee requests.

Special Property Situations

Personal Injury Awards

Rights to sue someone are considered property. Personal injury claims become part of your bankruptcy estate. State exemptions may protect some or all of the award.

Timing affects how much protection you get. Claims that haven’t settled yet may receive different treatment. Consult an attorney before filing if you have a pending claim.

Life Insurance Policies

Term life insurance has no cash value. It doesn’t affect your bankruptcy case. Whole life and universal policies with cash value are different.

State exemptions determine how much cash value you can protect. Life insurance proceeds you receive may be partially exempt. The type of policy and beneficiary designation matter.

Community Property

Nine states follow community property rules. Property acquired during marriage is jointly owned. Both spouses’ property may be affected by one spouse’s bankruptcy.

Community property states require careful planning. Creditors may access jointly owned assets. File jointly or separately based on your situation.

Leases and Bankruptcy

Filing bankruptcy doesn’t cancel your apartment lease. You can keep your lease by staying current on rent. Continue making timely payments and your housing stays secure.

The automatic stay temporarily stops eviction proceedings. You’ll need to catch up on back rent to stay. Bankruptcy can discharge old rent debt from before filing.

Rent owed after filing remains your responsibility. You can’t discharge post-filing rent obligations. An existing eviction judgment may proceed unless you meet special requirements.

Before You File: Important Steps

Don’t make unusual purchases before filing bankruptcy. Large or luxury purchases raise red flags. Stick to necessary expenses like rent, utilities, and groceries.

Avoid paying back friends or family before filing. Preferential payments can be undone by the trustee. Don’t transfer assets to others for safekeeping.

Spend money on genuine necessities without worry. Medical bills, car repairs, and basic living expenses are fine. Document your pre-filing spending carefully.

After Bankruptcy: Buying Property

You can get a mortgage after Chapter 7 bankruptcy. Waiting periods vary by loan type. FHA loans may be available in two years. Conventional loans typically require four years.

Your discharge puts you in better financial position. Lower debt-to-income ratio helps you qualify. Rebuilding credit after bankruptcy prepares you for homeownership.

Start preparing for a mortgage immediately after discharge. Pay all bills on time. Keep credit utilization low. Save for a larger down payment.

State-Specific Exemption Guides

Each state has unique exemption laws. Some states are more generous than others. Your state of residence determines which exemptions apply.

You must live in a state for two years to use its exemptions. Newer residents use exemptions from their prior state. Federal exemptions apply in some situations.

Review your state’s current exemption amounts. Many states increase exemptions periodically. Use the most recent figures when planning your bankruptcy.