A bankruptcy filing is a step-by-step process that, if done correctly, leaves the filer with significantly less, or even no, debt while still owning some important possessions. One term in this process is critical to understand: exempt property.
Most people know that Chapter 7 bankruptcy is usually referred to as "liquidation" bankruptcy. This label is due to the fact that a person who files for bankruptcy under Chapter 7 will need to turn over what amounts to "non-essential" or "non-exempt" property to the bankruptcy trustee, who then sells the property in order to satisfy the filer's debts. Celebrity bankruptcies provide the best examples of non-essential property, which might include fur coats, animal skin rugs and large tennis shoe collections. An average person may also have property that is non-exempt, including extra money and second vehicles.
The reason most people end up not turning over any of their property is because of exemptions. In a clear example of logic at work in the Bankruptcy Code, it is obvious that, in order for a person to start over from a fresh financial perspective, it makes little sense to strip them of all of their possessions - among them things that will help the person move forward in a more financially sensible manner. For that reason, property that is exempt in a bankruptcy filing can include clothing, the filer's primary vehicle, tools used in their profession and even pensions that will be relied upon later in life.
When a person gets to the point where they are considering Chapter 7 bankruptcy, they have usually done everything they could to avoid such an option. This might include taking action on their own to sell off property to satisfy debts. This is why so many people have nothing left to turn over to the bankruptcy trustee - and why knowing the difference between exempt and non-exempt property can be such a critical part of any bankruptcy filing. However, as bankruptcy exemptions differ from state-to-state, it can be critical to speak to an experienced attorney about one's specific situation in order to develop an exemption plan that works best.
Source: FindLaw, "Exempt vs. Non-exempt Property Under Chapter 7," accessed on July 27, 2014