What are exemptions and how do they work?

Exemptions  refers to what property a person gets to keep, that may not be seized by creditors. Exemptions apply whether someone is in a bankruptcy or not.  There are both federal and state exemptions. Most states do not allow the federal exemptions just the state exemptions.  Nevada only allows the state exemptions. Those that allow both require a bankruptcy filer to choose one or the other, either the state exemptions or the federal bankruptcy exemptions. You cannot mix and match.  The state exemptions have also been provided  for each state under the "state exemptions link." Belwo is also a list which shows whether a state allows the state exemptions only, the Federal exemptions only, or the Debtor's choice of  state or federal exemptions.  These materials also indicate which states allow you to choose the federal exemptions if you like. For some people, the state exemptions protect more of the type of property that a debtor in bankruptcy may have, for others...the federal exemptions may be more helpful.  There is no across the board general rule of thumb. Look at what you own and see what the exemptions allow you to keep, and then consult your attorney. 

Here is an example of how an exemption works. In Nevada vehicles are exempt up to $15,000.00. You own a car that was completely paid off and worth $10,000...the car would be totally exempt meaning the bankruptcy trustee would not take it. But, if the car was worth $20,000 and was completely paid off...then this would be $5000 more than the state exemption of $15,000 allows and the Trustee would probably seize the car and auction the vehicle to pay the $5,000 difference to the creditors.  Personal property is valued at garage sale value not at replacement value.  For example, a couch you paid $1,000.00 for...may only have a value on the bankruptcy schedules of $100. It is the amount that a reasonable person would pay for the property in its current condition-not new.  So don't overvalue your stuff when listing your assets. But don't undervalue your stuff either. If you undervalue property, you risk attracting the attention of the Trustee who may thinking you are trying to pull a fast one. A special note on home exemptions,  also known as homestead exemptions.  Equity in a home is protected up to a certain amount which varies from state to state. Equity is the difference between the value and the amount you owe. If your home is worth $200,000 and you owe $140,000, your equity is the difference of $60,000. 

Homes purchased within 1,218 days before filing are limited to a cap of $125,000 in equity. For example, Nevada allows up to $550,000 in equity as of the writing of this material. But if you purchased your home less than 1218 days ago you would only be entitled to the cap of $125,000. If the cap in your state is less than $125,000, it remains unaffected, meaning it does not increase to $125,000 just because you bought it less than 1218 days ago. Home exemptions are also limited to $125,000 if the debtor has been convicted of a felony, is guilty of state or federal securities fraud, racketeering, or intentional torts that have caused serious bodily injury or death within five years of filing.

The following is a list of property that is exempt under the Federal Rules of Bankruptcy

U.S. Bankruptcy Code - Exemptions

Section 522(d) as amended 1999

The following property may be exempted under subsection (b)(1) of this section:

The debtor's aggregate interest, not to exceed $18,450 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.

The debtor's interest, not to exceed $2,950 in value, in one motor vehicle.

The debtor's interest, not to exceed $425 in value in any particular item or $9,850 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

The debtor's aggregate interest, not to exceed $1,225 in value, in jewelry held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

The debtor's aggregate interest in any property, not to exceed in value $975 plus up to $9,250 of any unused amount of the exemption provided under paragraph (1) of this subsection.

The debtor's aggregate interest, not to exceed $1,850 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.

Any un-matured life insurance contract owned by the debtor, other than a credit life insurance contract.

The debtor's aggregate interest, not to exceed in value $9,850 less any amount of property of the estate transferred in the manner specified in section 542(d) of this title, in any accrued dividend or interest under, or loan value of, any un-matured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.

Professionally prescribed health aids for the debtor or a dependent of the debtor.

The debtor's right to receive -

a social security benefit, unemployment compensation, or a local public assistance benefit;

a veterans' benefit;

a disability, illness, or unemployment benefit;

alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless -

such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor's rights under such plan or contract arose;

such payment is on account of age or length of service; and

such plan or contract does not qualify under section 401(a), 403(a), 403(b), 408, or 409 (FOOTNOTE 1) of the Internal Revenue Code of 1986 (26 U.S.C. 401(a), 403(a), 403(b), 408, or 409). (FOOTNOTE 1) See References in Text note below.

The debtor's right to receive, or property that is traceable to -

an award under a crime victim's reparation law;

a payment on account of the wrongful death of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

a payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual's death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

a payment, not to exceed $18,450, on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent; or

a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

State, Federal or Both