How Bankruptcy Exemptions Work

Specific Bankruptcy Exemption Examples

Some states have a vehicle exemption but the dollar amounts vary wildly.
Some states have a vehicle exemption but the dollar amounts vary wildly.
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Exemptions can be a bit complicated, since they're not whole objects (e.g., a car), they're objects with a specific value (a $5,000 motor vehicle exemption). So let's say you want to keep your car, and your state has a $5,000 motor vehicle exemption. If your car is worth $5,000 or less, and you don't have a car loan, you can keep it. If your car is worth $10,000, and you have no car loan, your trustee will sell your car, give you $5,000 and use the remaining $5,000 to pay your creditors. However, if you have a car worth $10,000, but you also have a $5,000 car loan, the trustee would have to give the bank $5,000 to pay off your loan, and you $5,000 because your state has a $5,000 motor vehicle exemption. That means there would be nothing left to distribute to your creditors, so it wouldn't make any sense to do that. You'd get to keep your car [source: Bulkat].

Now let's say your state has a $2,000 car exemption, but your car is worth $5,000. No wheels for you? Not necessarily. Some states and the federal government have what's called a "wildcard exemption." Wildcards can be used to exempt any property. So if your state has just a $2,000 car exemption but also a $5,000 wildcard exemption, you could combine the two and save your car.

In addition to wildcard exemptions, federal nonbankruptcy exemptions may be available to help you. Federal nonbankruptcy exemptions are still bankruptcy exemptions; their contradictory name comes because they're not part of the Bankruptcy Code. These specialty exemptions are available to anyone filing through their state, but they're harder to snag because you typically have to be part of a certain group or occupation. They are also not available if you're using the federal exemptions. Here are a few examples of federal nonbankruptcy exemptions [source: Bulkat]:

  • Retirement benefits. Fully exempt for civil, foreign or military service employees; railroad workers; CIA employees; veterans; military Medal of Honor Roll; Social Security benefit recipients.
  • Klamath Indian benefits for Indians living in Oregon.
  • Seamen's clothing.