Must Know Federal Exemptions

The word "bankruptcy" often conjures up troubling images of destitute individuals who are required to leave their homes and valuable possessions behind and begin a new life without any resources or property to their name. This misconception is often the primary reason that individuals do not file for bankruptcy when they should.

Bankruptcy is designed to provide people with the opportunity to rid themselves of debt and start anew with no standing responsibilities to previous creditors. While it is true that an individual who files for Chapter 7 bankruptcy may be required to part with some valuable possessions, Federal bankruptcy exemptions have been instituted in order to ensure that a petitioner does not lose all of their belongings and property. Chapter 7 bankruptcy exemptions allow individuals to keep many of their cherished items even after they file for bankruptcy. There are also Federal bankruptcy exemptions related to the types of debts that can be discharged.

Chapter 7 bankruptcy exemptions outline specific debts that cannot be discharged through a bankruptcy petition. After an individual files for bankruptcy, he/she will still be required to pay alimony, child support, and school loans. The good news is that Federal bankruptcy exemptions also declare specific property that cannot be touched in the event of bankruptcy.

Under homestead exemptions, for example, individuals who own a home may be permitted to keep their house if they can continue making payments and avoid foreclosure. Chapter 7 bankruptcy exemptions protect up to $3,225 of an individual's purchased motor vehicle. Therefore, if an individual has paid for a car that is over $3,225, he/she will either need to surrender the car or financially compensate for the "non-exempt equity," meaning that he/she will be required to provide the bankruptcy estate with the difference so that it can be distributed amongst the creditors.

Federal bankruptcy exemptions conserve up to $10,775 of an individual's personal property, including clothing, furniture, pets, and books. They will also preserve up to $1,350 worth of jewelry.

Under Chapter 7 bankruptcy exemptions, petitioners will be permitted to keep up to $10,755 of their life insurance policy, as well as all of their Social Security benefits, unemployment compensation, and any restitution that they received for being the victim of an injury. If a petitioner is receiving alimony or child support, this also cannot be touched.

Federal bankruptcy exemptions protect an individual's 401(k) and up to $1,095,000 of a petitioner's IRA. Also, up to $925 of 'other' property will be protected under the wild card exemption. This means that if an important belonging was not protected under the other bankruptcy exemptions, an individual will be permitted to keep it under the wild card exemption. In short, because of the establishment of Chapter 7 bankruptcy exemptions, individuals who file for a Chapter 7 bankruptcy will not become destitute.

NEXT: Quick Overview of Bankruptcy Exemptions