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What Is Exempt and Nonexempt Property Under Chapter 7?

Deitz, Shields & Freeburger, L.L.P. Jan. 21, 2021

In a Chapter 7 liquidation case, the debtor must relinquish certain property to the bankruptcy trustee so that he or she can sell the property and use the proceeds to pay off debts. Property of the bankruptcy estate is broadly defined under Section 541 of the Bankruptcy Code. The estate is technically the legal owner of all of the debtor’s property and consists of all legal and equitable interests that the debtor has in property at the initiation of the bankruptcy case. Income that the debtor earns after the date of the petition is not included in the estate. Debtors, whether they are businesses or individuals, are often justifiably concerned about what property they will be allowed to keep and what they must give up.

A debtor must file a schedule of exempt property with the court. Exempt property is property that the debtor can protect from liquidation. The Bankruptcy Code allows each state to adopt its own exemption laws, which the debtor can select instead of the federal exemptions. It is important to consult with an attorney who can explain the exemptions available under your state’s laws and how they compare to the available federal exemptions.

Nonexempt Property

Items that the debtor usually must forfeit include:

  • Expensive musical instruments, unless the debtor is a professional musician

  • Collections of stamps, coins and other valuable items

  • Family heirlooms

  • Cash, bank accounts, stocks, bonds and other investments

  • A second car or truck

  • A second home or vacation home

Exempt Property

Certain types of property are exempt, meaning that the debtor can keep that property. Exempt property includes:

  • Motor vehicles, up to a certain value

  • Reasonably necessary clothing

  • Reasonably necessary household goods and furnishings

  • Household appliances

  • Jewelry, up to a certain value

  • Pensions

  • A portion of the equity in the debtor’s home

  • Tools of the debtor’s trade or profession, up to a certain value

  • A portion of unpaid but earned wages

  • Public benefits, including public assistance (welfare), social security and unemployment compensation, accumulated in a bank account

  • Damages awarded for personal injury

If you have questions about what property you will be allowed to retain if you file bankruptcy under Chapter 7 of the Bankruptcy Code, it is prudent to seek the counsel of an experienced and knowledgeable bankruptcy attorney who can respond promptly and accurately and put your mind at ease.

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