When you file for bankruptcy, under Chapter 7 or Chapter 13, there are various schedules that you also must attach to your petition. One of the most important schedules is Schedule C. Schedule C allows you to claim certain property as exempt from being taken by the trustee in the bankruptcy proceeding. In plain language, if property is exempt, you get to keep it.
State and federal exemption rules
Both state and federal bankruptcy laws have a list of property considered exempt. The laws vary by state and depend on how long you have resided in the state. In most states, you can only use the state allowable exemptions. Other states make you choose between state and federal exemptions. Very few states allow you to mix state and federal exemptions on your Schedule C. If you live in a state that allows you to choose, a bankruptcy attorney can assist you in determining which exemption list benefits you the most.
Examples of exempt property
Federal bankruptcy law and the law in most states allow you to keep a prescribed amount of equity in your home, called the Homestead Exemption. You may also keep your automobile and personal property such as your furniture, jewelry and clothes up to a certain value.
The way it works is that if your state, for example, allows you to keep $20,000 of equity in your home that is valued at $100,000 but you owe an $80,000 mortgage, the home is exempt. It has no value to the trustee since there would be no money left to pay other creditors after a sale.
On the other hand, if the home is valued at $150,000, the trustee may sell it, pay you your $20,000 exemption, pay off the mortgage and then use the $50,000 that remains to pay your creditors.
Filling out Schedule C
Schedule C is divided into columns. For each claimed exemption, you must describe the property you claim is exempt, list its full value and the value of the exemption you are claiming. The value is the value of the property at the time of the bankruptcy filing, not the value it was at the time you purchased it.
Most importantly, you must specifically identify the law that allows you the exemption. For example, if you are in California and keeping books you value at $550, the amount allowed by law, you would write “section 703.140(b)(3)” in the column that asks you to specify the law that allows you the exemption.