Exempt vs. Nonexempt Property in Chapter 7

How does the exempt/nonexempt line actually work?

Two statutes do the work. First, 11 U.S.C. § 541 says that starting a case creates an estate made up of "all legal or equitable interests of the debtor in property as of the commencement of the case," wherever located and by whomever held. That is deliberately broad — it sweeps in the house, the car, the bank account, the tools, the tax refund you have not received yet.

Second, 11 U.S.C. § 522(b) says that "notwithstanding section 541," an individual debtor may exempt certain listed property from the estate. So the estate is created first and exemptions are carved out of it afterward. Property left in the estate with no exemption over it is what people mean by nonexempt.

The Bankruptcy Court for the District of Arizona puts the practical result plainly: exemptions "may enable you to keep your home, a car, clothing, and household items or to receive some of the proceeds if the property is sold."

• Section 541 defines what comes in.
• Section 522 defines what can be taken back out.
• Whatever is left is what a Chapter 7 trustee may reach.

What changes the answer for one person versus another?

Four variables generally move the outcome more than anything else.

Which exemption list applies. Under 11 U.S.C. § 522(b), a debtor chooses either the federal list in subsection (d) or the state-and-other-federal-law list in subsection (b)(3) — but only where state law allows the federal choice.

Where you have lived. Section 522(b)(3)(A) applies the law of the place where your domicile was located for the 730 days before filing; if it was not in a single state for that period, it looks to the 180 days before that 730-day window. A recent move can therefore point at a different state's exemptions than the one you live in now.

Equity, not value. Exemptions attach to your interest, and § 522(a)(2) defines "value" as fair market value as of the filing date.

Whether you claim it. Exemptions are not self-executing.

What does federal law say about exemptions?

Section 522(b)(1) gives an individual debtor the choice between two paragraphs: paragraph (2), which is the federal list set out in § 522(d), or paragraph (3), which is state and local law plus federal exemptions found outside § 522(d). You take one or the other, not the better parts of each.

Married couples cannot split the difference. In joint cases under § 302, and in individual cases by or against spouses whose estates are jointly administered under Rule 1015(b), one spouse may not elect paragraph (2) while the other elects paragraph (3). If the parties cannot agree, § 522(b)(1) deems them to have elected paragraph (2) where that election is permitted.

Two categories in paragraph (3) matter to many households: certain interests held as a tenant by the entirety or joint tenant, to the extent exempt from process under nonbankruptcy law, and retirement funds in accounts exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code.

• Federal list: 11 U.S.C. § 522(d), available only where state law permits it.
• State-plus-other-federal list: 11 U.S.C. § 522(b)(3).
• Tax-exempt retirement funds are addressed directly in § 522(b)(3)(C).

Where do state rules differ, and how much?

This is the part that varies most. Section 522(b)(2) makes the federal list available "unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize" — and a number of states have said exactly that by statute.

Alabama, for example, provides that only property exempt under Alabama law and under federal laws other than § 522(d) may be exempted (Ala. Code § 6-10-11). Missouri (RSMo § 513.427), Iowa (Iowa Code § 627.10), South Carolina (S.C. Code Ann. § 15-41-35), Virginia (Va. Code § 34-3.1) and California (Cal. Civ. Proc. Code § 703.130) take the same approach. Others go the other way: Kentucky expressly authorizes a debtor domiciled there to use § 522(d) (KRS 427.170), and Arkansas gives residents an election between the state list and § 522(d) (Ark. Code Ann. § 16-66-217).

The dollar amounts also differ sharply by state. Those figures live on our state pages rather than here.

• States that bar the federal list include Alabama, Missouri, Iowa, South Carolina, Virginia and California.
• States that allow or require an election include Kentucky and Arkansas.
• California is unusual in offering two internal systems, one of which is an alternative bankruptcy-only list (Cal. Civ. Proc. Code § 703.140).

What does this look like in a real case?

The mechanics are less dramatic than the word "liquidation" suggests. You list everything you own on Schedule A/B, which walks through real estate, vehicles, household goods, financial accounts, retirement or pension accounts, insurance policies, claims against other people, and business property. That schedule tells you not to deduct secured claims or exemptions — it is a raw inventory.

You then complete Schedule C, checking a single box for which set of exemptions you are claiming: state and federal nonbankruptcy exemptions under § 522(b)(3), or federal exemptions under § 522(b)(2). For each item you either state a specific dollar amount or claim 100% of fair market value up to any applicable statutory limit.

If property is nonexempt, the trustee may sell it and distribute the proceeds. A secured lender's rights survive separately: as the District of Arizona explains, discharge relieves personal liability but does not eliminate a mortgage or security interest.

• Schedule A/B: what you own, before exemptions.
• Schedule C: what you claim as exempt, and under which system.
• Schedule D: what is secured by liens against that property.

What documents and information are involved?

Expect to gather ownership and value information for everything on Schedule A/B: address and type for real estate, make/model/year/mileage for vehicles, institution names for checking, savings, certificates of deposit and brokerage accounts, account types for 401(k), pension, IRA, 403(b), Keogh and thrift savings plans, insurance policies and their surrender or refund value, security deposits and prepaid rent, and any claims you could bring against someone else.

You will also need the loan balances that offset those values, since Schedule D captures claims secured by property.

The filing fees are fixed and published. A Chapter 7 case carries a $245 filing fee (28 U.S.C. § 1930(a)(1)(A), (f)(1)), a $78 administrative fee and a $15 trustee surcharge (Bankruptcy Court Miscellaneous Fee Schedule, Items 8 and 9). A Chapter 13 case carries a $235 filing fee (28 U.S.C. § 1930(a)(1)(B)) and the same $78 administrative fee.

What should you ask a lawyer about your own property?

The questions worth asking are the ones a general explanation cannot answer, because they turn on your specific facts and your district's practice.

A lawyer can also address two tools that interact with exemptions and are easy to misunderstand. Redemption under 11 U.S.C. § 722 lets an individual debtor redeem tangible personal property intended primarily for personal, family, or household use from a lien securing a dischargeable consumer debt, by paying the lienholder the allowed secured claim in full — but only if the property is exempted under § 522 or abandoned under § 554. And under § 522(c)(1), dischargeable tax claims may not be collected out of exempt property, while nondischargeable taxes generally remain collectible against it.

• Which exemption system applies given my domicile over the last 730 days?
• What is my actual equity in the house and the car once liens are subtracted?
• Is any of my property held as a tenant by the entirety or in joint tenancy?
• Are my retirement accounts of a type described in § 522(b)(3)(C)?
• Is redemption under § 722 realistic for my vehicle, and what would it cost?
• Would a trustee actually pursue anything in a case like mine, or abandon it?

Frequently asked questions

Does the trustee take everything I own in Chapter 7?

No. Filing creates an estate of your property interests under 11 U.S.C. § 541, but § 522 lets you exempt listed property back out of it. The Bankruptcy Court for the District of Arizona describes Chapter 7 as being for people willing to allow their nonexempt property to be used to pay creditors — which is a much smaller category than everything.

What happens if I forget to list something as exempt?

Official court guidance is direct on this point: exemptions are not automatic. To exempt property, you must list it on Schedule C: The Property You Claim as Exempt (Official Form 106C). If you do not list the property, the trustee may sell it and pay the proceeds to your creditors. Accuracy on the schedules is not a formality.

Can I use the federal exemptions instead of my state's?

Only if your state permits it. Section 522(b)(2) makes the federal § 522(d) list available unless the applicable state law specifically does not authorize it. States such as Alabama, Missouri, Iowa, South Carolina, Virginia and California have opted out by statute; Kentucky and Arkansas allow the federal list. Check your state page for which rule applies.

Can my spouse and I each pick a different exemption list?

No. Under 11 U.S.C. § 522(b)(1), in joint cases and in individual cases by or against spouses whose estates are jointly administered under Rule 1015(b), one debtor may not elect the federal list while the other elects the state list. If the parties cannot agree, they are deemed to elect the federal list where that election is permitted in the jurisdiction.

Are my retirement accounts treated differently?

They are addressed separately. Section 522(b)(3)(C) covers retirement funds held in a fund or account exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code. Court schedules list 401(k), pension, IRA, 403(b), Keogh, thrift savings and profit-sharing plans as accounts you must disclose on Schedule A/B regardless.

Does an exemption stop my mortgage lender or car lender?

It does not. Discharge relieves personal liability for a debt but does not eliminate a mortgage or security interest a lender holds in your property, as the District of Arizona's guidance explains. Section 722 provides a separate redemption route for certain tangible personal property, and it requires paying the allowed secured claim in full at the time of redemption.

When is my property valued?

Section 522(a)(2) defines "value" as fair market value as of the date the petition is filed — or, for property that becomes estate property later, as of the date it becomes estate property. That fixed date matters, because it means changes in value after filing do not retroactively change what your exemption covered on day one.

Sources

• 11 U.S.C. § 541 — Property of the estate · official source
• 11 U.S.C. § 522 — Exemptions · official source
• 11 U.S.C. § 722 — Redemption · official source
• Ala. Code § 6-10-11 — Exemptions in Federal Bankruptcy
• RSMo § 513.427 — Bankruptcy, exemptions allowed
• Iowa Code § 627.10 — Bankruptcy exemption
• S.C. Code Ann. § 15-41-35 — Exempt property
• Va. Code § 34-3.1 — Property specified in Bankruptcy Reform Act not exempt
• Cal. Civ. Proc. Code § 703.130
• Cal. Civ. Proc. Code § 703.140
• KRS 427.170 — Federal bankruptcy code exemptions applicable in Kentucky
• Ark. Code Ann. § 16-66-217 — Election of bankruptcy exemptions
• U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter: What can Bankruptcy do for you? What will it do to you?
• U.S. Bankr. Ct. D. Ariz., Instructions for Completing the Bankruptcy Petition, Schedules and Statements
• Bankr. E.D. La. official guidance — Chapter 7 Form Packet
• Bankr. S.D. Iowa official guidance — Instructions - Bankruptcy Forms for Individuals
• U.S. Bankr. Ct. D. Alaska, The Forms Individuals and Married Couples Need to File Bankruptcy
• 28 U.S.C. § 1930(a)(1)(A), (f)(1)
• 28 U.S.C. § 1930(a)(1)(B)
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8
• Bankruptcy Court Miscellaneous Fee Schedule, Item 9

Related

• Exemptions: what they protect
• Chapter 7
• Chapter 13
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