In Chapter 7 bankruptcy, the trustee liquidates the debtor’s assets for the benefit of the debtor’s creditors. However, an individual can keep certain property for the debtor to gain a fresh start. Whether property is exempt or non-exempt is important to both the debtor and the creditors. Exemptions were originally a matter of state law. Each state defined its exempt property. Congress then decided the states could use a federal list of exemptions. Some states required the debtor to use the state list of exemptions, others offered residents the option to choose the federal list of exemptions or the state’s – depending upon which would be more advantageous to the resident. Before you file bankruptcy, you may convert non-exempt property into exempt property, or sell non-exempt property and use the proceeds to pay debts that wouldn’t be dischargeable in bankruptcy, such as alimony or non-dischargeable taxes and student loans. These planning considerations are important. If you have significant assets, you must plan well ahead for bankruptcy.
