About Exemptions

• Under the U.S. Bankruptcy Code, exemptions are divided into state and federal. Individual state laws take precedence over federal laws when it comes to bankruptcy proceedings. Not all states allow for federal exemptions. In those states, you can only take the allowable state exemptions. Some states permit both federal and state exemptions. To determine which exemptions your state allows, you should speak with a bankruptcy attorney.
  
  

Homestead Exemption

• The homestead exemption determines whether your mortgage loan is exempt from bankruptcy based on the amount of equity in your home. The federal exemption limit is $125,000. This means if you have less than $125,000 of equity in your home, your mortgage loan is exempt from bankruptcy. If you have more than $125,000 of equity in your home, it is not exempt, and the bankruptcy trustee may choose to sell your home, using the proceeds to pay off your outstanding debts and court fees. Individual states have different homestead exemption limits.
  
  

Vehicle Loans

• If you have a vehicle loan, bankruptcy courts most commonly use the value limit method to determine whether your car loan is exempt. State exemptions for vehicles vary; the federal value limit for vehicles is $3,225 as of 2011. Using the federal limit as an example, if you owe $5,000 on a loan for a car that has a fair market value of $10,000, the car loan is not exempt, and the trustee may choose to sell your car. The trustee would then use the sale proceeds to pay your creditors and court fees. If you have a vehicle with an outstanding loan and the fair market value of the car is less than the exemption limit, the loan is exempt from bankruptcy proceedings. In this case, the trustee will not sell your car.
  
  

Considerations

• U.S. bankruptcy courts do not allow you to claim federal and private student loan debt in bankruptcy. To take any other allowable exemptions, you must complete a Schedule C, Property Claimed as Exempt. If you do not complete this form, the court will not exclude this property and the loans attached to them from bankruptcy. If you take an exemption for an outstanding loan, you must prove to the court that you are financially able to continue to make monthly payments.