What Is Nonexempt Property Under a Chapter 7?

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    Exemptions

    • The source of property exemptions is in both federal and state laws. Under the federal bankruptcy code, bankrupt property is that defined as such at 11 U.S.C. § 522(b)(3). Alternatively, many states have their own separate list of exempt property, which is permissible under (b)(2). A few states, like California, allow the debtor to choose whether to take the federal or state exemptions. Only one list can be used, and the choice must be reflected on Schedule C to the bankruptcy petition.

    Exempt Property

    • Under the federal bankruptcy exemptions, certain types of property are untouchable by the bankruptcy trustee. In this category are public benefits, pensions and damages awarded by a court for personal injury. Other types of property are exempt up to certain amounts, such as some of the equity in your home and automobile, clothing and household furnishings. State laws on property exemptions often include some amount of cash, tools of your trade or a wildcard that can be used for any personal property.

    Nonexempt Property

    • Any property that is not explicitly exempt or covered by a wildcard exemption is nonexempt property and subject to liquidation in Chapter 7. Second homes or cars, collections of stamps or coins, musical instruments and other similar personal property is generally nonexempt. Property that is only partly exempt, like a home or automobile, can be sold and the exemption amount can be provided to you in cash to find a lower cost replacement. It may be possible, however, to overlap exemptions. For example, you may be able to apply the tools of the trade exemption to your car if it is necessary for your work.

    Claiming Exemptions

    • Bankruptcy exemptions are claimed by filing Schedule C along with your bankruptcy petition. The available exemptions can be a crucial factor in deciding whether to file bankruptcy. Because many of the exemptions are higher for married couples filing jointly, there can be some incentive for spouses to file bankruptcy together to keep more of their property. If the total amount of property you own falls within the bankruptcy exemptions, you will not have to liquidate any property and you still get the benefit of the bankruptcy discharge.

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