Some property is exempt during bankruptcy, which means that it is not taken by the bankruptcy court and liquidated in order to make payments to creditors as part of the bankruptcy estate. The reason exemptions exist is to ensure that the bankruptcy process has the impact it should. Bankruptcy is meant to help debtors seek a legal way out of crushing debt scenarios while also making some payment to creditors. Taking every single thing a person owned — particularly things required for daily life — would have an opposite affect. The person would be left destitute and have to get into debt again to pick up the pieces.
Exempt property depends in part on the manner with which you file the bankruptcy and your personal situation. Common exempt property includes a certain amount of personal jewelry, reasonable amounts of clothing and daily personal supplies required for living, appliances and tools used for your work or trade. Personal vehicles might also be exempt, especially if you use them to go to work or school, and in some cases, a home might be exempt. Whether your home is exempt or not depends in part on the equity you have in it.
Property that is almost never exempt includes second vehicles, vacation homes and recreational vehicles such as boats or RVs. Family heirlooms, valuable collections and expensive instruments owned by someone who is not a professional musician are all examples of other items that are not exempt.
Understanding what exemptions might be relevant to the bankruptcy process helps you preserve your way of life through bankruptcy and beyond. Working with a legal professional helps you avoid making mistakes that could lead to giving up otherwise exempt property.
Source: FindLaw, “Exempt vs. Non-exempt Property Under Chapter 7,” accessed Jan. 22, 2016