Exempt and Non exempt Assets

In the bankruptcy process, all assets of the bankruptcy estate are determined by state and federal bankruptcy laws to be either exempt or non-exempt for liquidation. Any asset, including equity determined by law to be exempt, is left in the control of the debtor during the bankruptcy process.

Any non-exempt asset can be liquidated by the bankruptcy court to pay debts owed by the bankruptcy estate. By making certain assets exempt from bankruptcy liquidation, a filing debtor has a better opportunity to make a fresh financial start after bankruptcy.

Each state has their own allowable bankruptcy exemptions as described by state bankruptcy laws, but in most cases, a filing debtor has the opportunity to choose whether to use the federal or state exemptions. Depending on the state where the filing debtor files, they either have to use state exemptions, they can choose between state or federal exemptions, or they can use the federal exemptions. The debtor cannot choose both federal and state exemptions. If a choice is allowed, it is one or the other but not both.

The notion of exempt and non-exempt can be confusing. The terms are also used in determining which debts will be or will not be discharged in bankruptcy. Certain debts can be discharged by bankruptcy, and there are certain debts that can never be discharged by bankruptcy (see exempt and non-exempt debts).