Exemptions in Bankruptcy

Exemptions enable a debtor to protect certain assets during bankruptcy so that he or she does not lose them. An exemption can apply either to an asset in total, such as a car, or to the value of an asset up to a certain amount of equity. The federal government has its own set of exemptions it allows, as do individual states, including Washington. The state of Washington allows the debtor to apply either the federal or state exemption rules, and debtors are free to choose whichever set of rules is most advantageous for them, although they are not allowed to “mix and match” between the two sets of bankruptcy exemptions.

Debtors living in Washington are not necessarily entitled to select the Washington state exemption scheme unless they have lived here continuously for two years (actually 730 days) prior to filing for bankruptcy. A debtor who has lived here for less than two years must choose either the federal exemptions or the exemptions of the state where the debtor lived for the majority of the 180 days before the two-year period.

There are also limits on exemptions for married couples. If spouses file separate bankruptcies, the first spouse to file determines the exemptions for the married couple. In a joint case, the married couple must choose the same exemption scheme—they cannot mix state and federal schemes. If the spouses cannot agree, the joint filers are deemed to have selected the federal exemptions.

Here are the current federal and Washington state exemption lists:

Federal Bankruptcy Exemptions
Exemptions Limit (where applicable)
Real property or personal property; this includes co-ops and mobile homes. $22,975 [$45,950]
Motor vehicles $3,675 [$7,350]
Household furnishings, goods, appliances, books, animals, crops and even musical instruments. $575 for any single item or $12,250 in aggregate
Jewelry $1,550
Tools of the Trade $12,250.00
Universal or Whole Life Insurance Policy $12,250
Unmatured Life Insurance Policies Exempt
Alimony, child support payments needed for support Exempt
Health aids Exempt
Retirement Funds / 401K / 403(b) etc. Exempt
Lost earnings payments, public assistance, social security, unemployment compensations, veterans’ benefits, wrongful death payments Exempt
Personal bodily injury award $22,975
“Wildcard” The debtor’s aggregate interest in any property, not to exceed in value $1,250 plus up to $11,500 of any unused amount of the exemption provided under “Real property or personal property” above.
Tuition Education Credits Within 1 year = not exempt; prior to 720 days = exempt; 6,225 otherwise
Washington State Bankruptcy Exemptions
Exemptions Limit (where applicable)
Homestead—net value of lands, improvements & personal property $125,000
Future earnings on day of filing 75 percent
Motor vehicle for each individual; 2 motor vehicles as community property of spouses $3,250; $6,500
Household furnishings, goods, provisions; no single item can exceed $750 $6,500; $13,000
Private libraries, including electronic media $3,500; $7,000
Family pictures and keepsakes Exempt
Wearing apparel Exempt
Jewelry, furs, personal ornaments $3,500; $7,000
Other personal property (except earnings); not more than $500 in cash or bank account $3,000; $3,000
Occupational or trade tools $10,000
Professional tools of trade, supplies, furnishings $10,000
Annuities contract proceeds $3,000 per month
Federal pension benefits Exempt
Life insurance proceeds—group Exempt
Life insurance proceeds Exempt
Retirement, disability benefits Exempt
Alimony, child support payments needed for support Exempt
Health aids Exempt
Lost earnings payments, public assistance, social security, unemployment compensations, veterans’ benefits, wrongful death payments Exempt
Personal injury on account of personal bodily injury not including pain and suffering or compensation for actual pecuniary loss or the right to loss of future earnings $20,000.00
Tuition Units purchased more than 2 years prior to bankruptcy Exempt

Exempting an asset protects it from liquidation by the bankruptcy trustee. In a Chapter 13 case, if the debtor’s assets are fully exempt, the debtor is only required to pay disposable income into the plan. However, if the debtor’s assets are only partially exempt (for example, if the debtor owns a car outright that is worth more than the maximum allowable exemption for a vehicle), he or she will have to make enough payments over the course of the plan to equal the fair market value of the non-exempt assets the debtor intends to keep. In some cases where the debtor has significant non-exempt assets, the debtor may be able to convert non-exempt value into exempt value with the help of an attorney.

This is obviously an incomplete treatment of the subject of exemptions, and there are additional rules, exceptions, and complications that prospective bankruptcy filers need to be aware of. Contact us to find out more about filing for bankruptcy and to be sure you know your rights.