Bankruptcy Exemptions -

     Exemptions were established by common law centuries ago in England. They were granted to a debtor by the grace and favor of the state, on the grounds of public policy and for generous and humane purposes. A debtor was allowed to keep his clothing, bedding, and tools of his trade, free of creditor claims, up to a certain dollar value. The thinking was that this was better for society than to allow creditors to strip debtors bare of all earthly essentials and dignity.

Federal Bankruptcy Act of 1898

     Exemptions were codified in the English 1845 Small Debts Act, Paragraphs 8 & 9, and found their way into the Federal Bankruptcy Act of 1898. They have remained an integral part of the fabric of federal bankruptcy law ever since.

What Are Exemptions?

     Exemptions allow individual debtors to keep certain types of property free from the claims of unsecured creditors and from seizure by the bankruptcy trustee. They have a centuries-old humanitarian tradition under English common law, and date back to at least 1898 in the United States. They allow the debtor to keep a minimum level of essential assets with which to pursue his post-bankruptcy "fresh start".

Available Exemptions - Section 522

     The exemptions available to bankruptcy debtors are codified in Section 522 of the Bankruptcy Code. That section provides debtors with 12 different types of exempt property. It also allows the states to "opt out" of the federal exemptions, and make their own state law exemptions, with certain exceptions, available to debtors filing bankruptcy in that state. Most states have opted out, which means that there are substantial differences in the exemption laws from state to state. A local bankruptcy expert should be consulted so that the proper exemptions can be explained and taken.

How Exemptions are Claimed

     When a bankruptcy petition is filed, the debtor lists all of his real estate on Schedule A-Real Property, and all other property on Schedule B-Personal Property. The debtor then completes Schedule C-Property Claimed as Exempt, and identifies the property from Schedules A & B that he wishes to claim as exempt. If a debtor fails to file a Schedule C, then under Bankruptcy Code Section 522(l), the list of exempt property can be filed by the debtor's spouse or dependent.

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Objection to Exemptions

     A creditor or the trustee can object to the debtor's exemptions, at any time up to thirty (30) days after the conclusion of the meeting of creditors. If no objections are filed by that deadline, then the exemptions become final and allowed, and cease to be property of the estate. This can be the case even if the debtor was not legally entitled to claim the exemption, per the 1992 U.S. Supreme Court decision of In re Taylor v. Freeland & Kronz, 503 U.S. 638.

Effect of Allowance of Exemptions

     Legally, all of the debtor's property comes into the bankruptcy estate on the filing of the bankruptcy petition. Thereafter, upon allowance of the exemptions, the exempt property leaves the estate. There is no requirement that the debtor file any further document, once the deadline has passed. However, some attorneys may file an ex parte application for an order confirming that the exemptions have been allowed, especially if there is any doubt or uncertainty on that point. Once allowed, under Bankruptcy Code Section 522(k), with certain exceptions, exempt assets are not liable for payment of any administrative expenses, like trustee fees.