Bankruptcy is usually a last resort because it comes with risks and downsides. To minimize risk, there are laws that protect you while allowing creditors to pay some of the debt.
Filing for bankruptcy doesn’t mean you have to give up everything you own. Bankruptcy is a process designed to get people and businesses back on their feet. Nonetheless, all assets are measured and valued and can be used to pay down some of the outstanding debt.
What creditors can afford in bankruptcy
In a Chapter 7 bankruptcy, any non-exempt assets can be used to pay off your creditors. These include:
vehicle
nation
houses
investment property
saving account
any other valuables such as art or jewellery
You can keep a certain amount due to federal and state bankruptcy immunity.
What will you keep if you file for bankruptcy
The law is made to protect your property during bankruptcy and is called a bankruptcy immunity; however, exceptions vary by process and status.
Common federal bankruptcy exemptions are listed below. Married couples filing jointly can double the allowance, with all amounts shown for cases filed after April 1, 2022. As of March 31, 2025, these figures will be adjusted again.
Property Exemption
Your primary residence may be exempt when you file for bankruptcy if the net worth of your primary residence is below the exemption limit. Under a federal exemption, you can protect up to $27,900 in assets in your home.
Homestead exemptions may apply to your primary residence and qualify as follows:
House or other apartment
Personal property used as a residence
Vehicle Exemption
Because your vehicle is an asset, creditors can go after it if you file for bankruptcy. However, your vehicle may be considered exempt depending on the type of bankruptcy you are filing for, whether you own, lease or finance the vehicle and its value. Under the federal bankruptcy immunity law, you can forgive some vehicle assets up to $4,450.
If your net worth exceeds the limit, several things can happen:
The trustee can sell your vehicle, pay you the forgiveness amount, and use the rest to pay creditors
Lenders can repossess the car if you default on your payments
You can return your vehicle, which frees you from car loan liability after bankruptcy
Exceptions for Personal Effects and Household Goods
In addition to real estate and your vehicle, personal property may also qualify for bankruptcy immunity. Here are some commonly claimed federal personal property exemptions:
$1,870 in jewelry
Hand Tools $2,800
$14,875 total ($700 per item) for household goods and furniture, appliances, clothing, animals, books, plants, or musical instruments
Accrued interest, dividends or loan value on life insurance contracts $13,400
Professionally prescribed aids
Salary, Benefits and Waivers for Retirement Accounts
There are some exceptions to protecting funds you receive as a benefit, support or retirement plan, including:
Alimony, support or maintenance that your support reasonably requires
The life insurance benefits you need to support
All Social Security benefits, unemployment benefits, veterans benefits, benefits, and disability or sickness benefits
In most cases, you can keep the total earnings in your retirement account at $1,512,350
Damage Recovery Exception
Exceptions to personal injury recovery include:
$27,900 for personal injury recovery, excluding pain and suffering or property damage
Compensation for loss of future income required to maintain
Pay for the wrongful death of someone you rely on for assistance
Compensation for crime victims
Wildcard exception
Wildcard exceptions can be used for any type of property. The tax exemption is $1,475 plus $13,950 for the tax-exempt unused portion of your property.
Federal and state exemptions
Some states have their own exemptions that differ from the federal exemption. In some states, you may choose to use state or federal bankruptcy immunity:
- Alaska
- Arkansas
- Connecticut
- District of Columbia
- Hawaii
- Kentucky
- Massachusetts
- Michigan
- Minnesota
- New Hampshire
- New Jersey
- New Mexico
- New York
- Oregon
- Pennsylvania
- Rhode Island
- Texas
- Vermont
- Washington
- Wisconsin
If your state does not have its own laws, you will be subject to federal regulations.
The difference between Chapter 7 and Chapter 13 bankruptcy
The most common bankruptcy options are Chapter 7 bankruptcy and Chapter 13 bankruptcy, each with pros and cons, and the type of bankruptcy can affect the assets that are withheld or taken from you.
Chapter 7 bankruptcy allows you to legally pay or stop paying most of the debt you owe at the time of filing. Only certain debts are forgiven and you must pass a means test to qualify.
You could lose some non-exempt property this way—especially anything that isn’t your primary residence. If you transferred property before filing for bankruptcy, the transfer can be reversed. Your debt will be completely forgiven, and Chapter 7 is the easiest option to get when you can’t afford a payment plan.
Chapter 13 bankruptcy allows you to enter into a payment plan to pay off your debts within three to five years. In 2021, the program was extended to seven years after President Biden enacted the Bankruptcy Assistance Extension Act. The Chapter 13 process protects your property and prevents wage withholding. Unlike Chapter 7, your debt will not be forgiven. Instead, you pay off your outstanding debt through a monthly payment plan determined by your disposable income.
What you should know before filing for bankruptcy
As a result of your bankruptcy filing, your credit will suffer for 10 years in the case of Chapter 7 bankruptcy and 7 years in the case of Chapter 13 bankruptcy.
Although you are not required by law to hire a lawyer for bankruptcy, it may be in your best interest to do so. You can even find free legal advice.
So learn more:
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