When you file Chapter 7 bankruptcy, the court will liquidate or sell your assets to repay your debts. While this may seem alarming, the good news is that the law allows you to exempt some of your property, which means you get to keep it and the court cannot take it for debt repayment.
According to the United States Bankruptcy Court, exemptions are available at the state and federal levels.
Which exemptions to use
You will have to choose which set of exemptions you want to use because you can mix them. For example, if the state allows you to exempt $5,000 for a vehicle and $20,000 for a home and the federal government allows you to exempt $2,000 for a vehicle and $50,000 for a home, you cannot use the vehicle exemption from the state and the home exemption from the federal. You must choose to either use the state or the federal, which means you need to figure which exemption options give you the best overall chance to protect your assets.
The goal of exemptions
The point of exemptions is to allow you to retain possessions so that you can rebuild after your bankruptcy. They also recognize that you must retain some basic necessities. At the same time, though, the design of exemptions is to ensure you can keep only what you need.
For example, the exemption for vehicles at both the state and federal level is rather low. They will basically allow you to keep a cheap vehicle. You will not be able to keep an expensive sports car, which the law sees as excessive and something worth selling to repay creditors.