How to Protect Property Using Exemptions in Chapter 7 and Chapter 13 Bankruptcy

By Cara O'Neill, Attorney
Learn what you must do to keep your property when you file for bankruptcy.

Filing for bankruptcy doesn’t mean that you’ll lose everything that you own. You’re allowed to exempt (protect) the assets that you’ll need to work and maintain a home, such as furniture, gardening tools, clothing, and a modest car. What will happen to your nonexempt assets—those that you can’t protect—will depend on whether you file for Chapter 7 bankruptcy or a Chapter 13 case.

(If you aren’t sure which bankruptcy is right for you, you can learn about the two most frequently filed types by reading Choosing the Type of Bankruptcy: Chapter 7 or 13.)

Claiming Exemptions in Chapter 7 and Chapter 13 Bankruptcy

You’ll want to protect your assets when you file bankruptcy, but how are you to know what you can and can’t exempt? The answer is simple: Your state law will tell you.

Federal law gives each state the right to create its own exemption list for its residents, and most do so. However, some states elect to use the federal exemption list. Others will allow you to decide whether you’re better off using the state or federal set (and if given a choice, you’ll want to research both options).

Once you’ve determined the proper exemption source, you’ll look to see whether your property is included on the list. If so, you’ll be able to protect it. What will happen to property that isn’t covered by an exemption—called “nonexempt” property—will depend on the bankruptcy chapter.

(To find the federal exemption list, read What Are Federal Bankruptcy Exemptions? You’ll find state-specific articles on our Personal Bankruptcy topic page.)

Chapter 7 Bankruptcy

In this bankruptcy type—which is also known as a liquidation bankruptcy—the court-appointed bankruptcy trustee has the power to sell, or “liquidate,” nonexempt assets and use the sales proceeds to pay your creditors. So it’s important to understand which property you’ll stand to lose before filing your matter (if any).

If you own nonexempt property that is particularly valuable to you, the trustee might allow you to buy it back. The amount you’ll pay is typically the asset’s market value, reduced by the trustee’s cost to sell it. You won’t be able to use nonexempt funds to purchase it, so you’ll need to demonstrate that you’re paying for it with money that isn’t part of the bankruptcy estate, such as income that you earn after the filing of your Chapter 7 bankruptcy case.

(For a general overview, read Chapter 7 Bankruptcy Exemptions: What Property Can I Keep?)

Chapter 13 Bankruptcy

You’ll be able to keep nonexempt property in a Chapter 13 bankruptcy, but it will come at a cost. You must pay unsecured creditors the value of the nonexempt property as part of the repayment plan. Because your monthly plan payment will be calculated using the value of the nonexempt property, if the property is valuable, your monthly payment will be high. If your income isn’t sufficient to cover it, you’ll have to sell assets and use the proceeds to pay debt.

Listing Property and Exemptions in the Bankruptcy Paperwork

Bankruptcy exemptions aren’t given to you automatically. You must claim the exemptions in your bankruptcy paperwork by identifying the Washington exemption statute that applies to your property. You’ll claim your exemptions as follows:

It’s common for people to ask whether they can “exclude” property in bankruptcy, and the answer is no. The form instructions make it clear that you must list all of your assets in your paperwork, and failing to respond fully to the questions in the schedules could subject you to criminal penalties that can include 20 years of prison time, a $250,000 fine, or both.

Questions for Your Attorney

  • Will I lose assets by filing for Chapter 7 bankruptcy?
  • Would filing a Chapter 13 case be the better choice for me?
  • How much will my payment be if I file for Chapter 13 bankruptcy?
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