Looking at the function of exemptions in bankruptcy, P.1

Last time, we mentioned that having a solid understanding of bankruptcy exemptions can help a debtor to determine not only whether Chapter 7 or Chapter 13 bankruptcy will allow the debtor to save his or her home, but also generally which form of bankruptcy is more appropriate for his or her overall financial situation. This assumes, of course, that the debtor has the ability to opt for either form of bankruptcy.

Exemptions are dealt with differently in Chapter 7 bankruptcy and Chapter 13 bankruptcy. The difference is reflected primarily in the unique aim of each of these forms of debt relief. As we’ve previously said, Chapter 7 aims to liquidate a debtor’s assets and use the proceeds to pay back creditors. This is different than Chapter 13, which has the aim of getting the debtor on a repayment plan in order to pay creditors back over a period of time.

In the context of Chapter 7 bankruptcy, exemptions refer to property that is not required to be liquidated by the Bankruptcy Court in order to move forward with the process. Exemptions are determined at both the federal and the state level, depending on the state. The Federal Bankruptcy Code identifies standard exemptions, and allows states to either adopt these exemptions or to opt for a package of exemptions made available under state law. Some states have their own set of exemptions, but allow debtors to supplement with certain federal exemptions. In joint bankruptcy cases—those involving married couples—each debtor has the ability to select a full set of exemptions.

In general, debtors who have property they consider to be valuable which does not qualify as an exemption are generally going to want to choose Chapter 13 bankruptcy, which will give them the opportunity to pay back debtor without losing that property. In our next post, we’ll look at how exemptions work in Chapter 13 bankruptcy