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Bankruptcy Exemptions

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People who are in debt can “exempt” (protect) certain income and property from their creditors. The amount and type of property a debtor can exempt varies depending upon the creditor who is collecting. The amount a debtor can shield from favored creditors, the IRS for example, may be startlingly small.

In most cases the debtor can select from a generic list of exempt property that varies from state to state. Exempt property in Wisconsin includes up to $5,000 of non-business funds in a bank account, household goods with a value up to $12,000, and $75,000 equity in a home. Certain income is also exempt from most creditor claims, including social security benefits.

Because of exemptions, a debtor with few assets and little income may be “judgment proof.” Such a debtor is fully protected from creditor’s claims, including claims of creditors that have taken a judgment against the debtor.

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Exemptions in bankruptcy. Wisconsin law allows a debtor who files for bankruptcy relief to select exemptions from either the state list or a separate federal list. The federal list is more generous with respect to some assets and less generous with respect to others. So a debtor must take care to select the most favorable list in light of the debtor’s assets.

In addition to selecting an exemption list, a debtor with substantial assets may enhance the amount of property protected from creditors in bankruptcy by “exemption planning” before the bankruptcy begins. Exemption planning involves selling or mortgaging non-exempt property and using the proceeds to buy exempt property. The debtor must take care to be sure that the exemption plan is well designed and is carried out within the bounds of the law.

Read more about exemptions and exemption planning.