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Every state of the United States has enacted “exempt property” laws that protect certain property or assets from being taken from debtors, even if one or more creditors has obtained a court money judgment against the debtor. These same state exempt property laws apply in federal bankruptcy court proceedings and protect your property when you file bankruptcy. The bankruptcy trustee cannot take or liquidate (sell) any of your exempt property.

The United States Bankruptcy Code contains a list of suggested bankruptcy exemptions, known as the “Federal Bankruptcy Exemptions”. However, the Bankruptcy Code allows individual states to “opt out” of using the Federal Bankruptcy Exemptions and to instead require debtors filing bankruptcy in that state to use the state-enacted exempt property laws.

All but 19 states have opted out of using the Federal Bankruptcy Exemptions. The following states currently give debtors a choice between using the Federal Bankruptcy Exemptions and the state law exemptions: Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

In most states, all or most property owned by individuals is exempt. Therefore, individuals filing bankruptcy typically retain (keep) all of their property. In a Chapter 7 bankruptcy case, if all the debtor’s assets are exempt or encumbered by valid mortgages or other liens, the trustee will file a “no asset” report with the bankruptcy court. In such case, there is no distribution to unsecured creditors and all or most of the debtor’s debts will be discharged (legally forgiven) without any payment to unsecured creditors.

In order to retain exempt assets when a debtor files bankruptcy, the debtor must claim each asset as exempt on Official Form 106C (Schedule C: The Property You Claim as Exempt) and cite the specific applicable state or federal law which exempts each asset.