Eliminate Your Fears About Bankruptcy Exemptions

December 23, 2015

What Are Bankruptcy Exemptions? What Does “Exemption” Mean?

Bankruptcy “exemptions” can be a confusing concept if you have never been exposed to the bankruptcy process.  Many debtors have fears about bankruptcy exemptions, but many times there is nothing to fear.  Bankruptcy exemptions also vary from state to state, adding further confusion to the subject.  Bankruptcy exemptions are actually quite simple.

Exemptions, as they pertain to bankruptcy, are simply amounts or types of property “taken out of” the bankruptcy “equation.”  Essentially, property protected by an exemption cannot be taken for your creditors during your bankruptcy case.   Any property valued within your exemption amount will be protected during your bankruptcy.


To understand the concept of an “exemption,” let’s take a quick look at the word’s etymology and background.   The Latin word behind “exemption” is “exemptio” (premiere) which means to “take out” or “free out.”   Therefore, every time the word exemption is used today, it usually refers to “freeing” someone of an obligation or the “taking out” a certain amount of property not to be counted.

To further break down the concept, the “ex” prefix of the word means “out of”.   The second part of the word, “empt” is similar to the modern English word “empty.”   To “empty” or remove someone “out of” a responsibility or obligation – this is the essence of the “exemption” concept.


But, how do exemptions work?   For example, if your state allots an exemption of $10,000 for an automobile, then the total value of your automobile would need to be under $10,000.   If your vehicle had a $14,000 value (and it was paid-in-full), your automobile would have $4000 of value not protected!

If you filed Chapter 7 in the above situation, you would be forced to pay the assigned bankruptcy trustee $4000 to cover the difference – or your automobile could sold!  If you could not pay, the vehicle could be sold by the bankruptcy trustee.  If it were sold, the trustee would give you a check for $10,000 (because of the exemption).   The $4000 or any extra amount obtained in the sale would go towards bankruptcy trustee fees and repaying creditors.

A clear understanding of bankruptcy exemptions is critical for bankruptcy planning.   In preparation for Chapter 7 bankruptcy, the best case scenario would be that ALL your property is protected by your state’s bankruptcy exemptions.   Only a bankruptcy attorney can properly predict whether you will lose property during a bankruptcy proceeding.   Although anyone can understand the basic concepts behind bankruptcy exemptions, only a local bankruptcy attorney has the daily experience of applying the exemptions on a case-by-case basis.

~Indianapolis Bankruptcy Attorney John Bymaster




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