Bankruptcy Exemptions: Schedule C

Choosing your exemptions is critical to what property you keep after bankruptcy

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One of our bankruptcy system's purposes is to give people who have had financial issues a fresh start. To that end, no bankruptcy judge is going to leave a debtor (someone who files for bankruptcy) destitute. Bankruptcy proceedings always leave the debtors with the basics for a new start, such as furniture, clothing, household goods, a car and equity in a home.

The property that you're allowed to keep in a bankruptcy case is called exempt property. The bankruptcy code requires that you claim those exemptions, so the court and your creditors will know what property you intend to keep. 

Bankruptcy Exemptions

State and federal laws define assets that can be claimed as exemptions. Exemptions are not only used for bankruptcy filings; they apply when a creditor obtains a judgment and wants to take the property of a debtor to satisfy the debt.

Congress has also passed a set of federal exemptions. Depending upon where you live and file for bankruptcy, the state's law may permit you to use the state's exemptions instead of the federal ones. For example, in California, there are no state exemptions, just federal. Texas allows you to choose whether to apply state or federal exemptions.

Bankruptcy exemptions can become complex. Interpreting the laws and representing yourself may end up in disaster.

Bankruptcy Schedule C

One of the documents you file with your bankruptcy paperwork is Schedule C: The Property You Claim as Exempt. It is arguably the most crucial document that you complete when filing for bankruptcy because it contains your exemption claims.

These exemptions permit you to keep property that would otherwise become the property of the bankruptcy estate and the bankruptcy trustee.

When you file for bankruptcy, you might think it would be nice to have someone help you type up the forms. However, petition preparers cannot help you fill out the forms, file them for you or tell you how to complete them. Court employees cannot assist you either.

Completing Schedule C

Since you are required to fill out Schedule C by yourself, it's important to understand how to fill the form out. Here are explanations for the questions and sections on Schedule C.

Part 1, Question 1

In Part 1 of Schedule C, you will notice that the document requires that you select a box indicating whether you are claiming exemptions under 11 U.S.C. section 522(b)(2) or 11 U.S.C. section 522(b)(3). If you choose state law exemptions, select 522(b)(3); section 522(b)(2) indicates that you have selected federal law exemptions.

Part 1, Question 2

Starting with Question 2, you will list all of the property from Schedule A/B for which you claim an exemption. If you do not list property from Schedule A/B, it will not be exempt, and the bankruptcy trustee may take it and sell it. You should use the same descriptions that you used in Schedule A/B.

You will also state the current value of the portion of the property that you own. You can choose to list a specific amount. For example, in California, section 703.140(b)(3) allows residents to claim up to $725 per item for household goods and furnishings.

Thus, in that example, you would put $725 in the blank for the value. As an alternative, you can choose to say that you are claiming 100% of the fair market value, up to any limits listed in the applicable exemptions statute you are using.

Each state has its own set of exemptions—they might not all be the same. There are also exemptions contained in the U.S. bankruptcy code and other federal statutes.

Another column asks for specific laws that allow the exemption. In this blank, you will put the specific code section that allows the exemption. For example, in California, you would cite California Code of Civil Procedure section 703.140(b)(3) for exemptions in household goods and clothing.

Part 1, Question 3

Question 3 asks whether you are claiming a homestead exemption of more than a specific amount (which adjusts every three years) and whether you acquired the property more than 1,215 days before filing the bankruptcy case.

If you obtained the homestead recently, you're limited to a specific amount you can claim as an exemption. The current maximum is $170,350. This prevents filers from converting non-exempt assets into cash and using that cash to purchase an expensive property not long before filing bankruptcy.

Part 2

Part 2 on the second page is a continuation of Part 1, Question 2. You can also add additional pages as necessary to ensure that you have covered all property you wish to exempt.

Dealing With Exemption Objections

After you file your bankruptcy, any creditor, the bankruptcy trustee, or the U.S. Trustee can object to your exemption claims. This is done by filing a written objection with the bankruptcy court.

A bankruptcy judge will conduct a hearing for any objections. A party may object to your exemption claims for a variety of reasons, such as improperly categorized exemptions (like claiming an exemption for clothes under an exemption statute for a car).

The objector must file within 30 days after the trustee concludes your meeting of creditors or within 30 days of any amendments to Schedule C. The trustee has up to one year after closing the case to object if the debtor fraudulently claimed an exemption.

If no one objects to your exemptions within the above-referenced periods, your exemptions will be allowed by "operation of law" and are exempted automatically.

Consider Getting Professional Help

Bankruptcy exemptions are complicated. You're not required have to hire an attorney to represent you when you file a bankruptcy case; however, one of the most important reasons you might pay for legal assistance is choosing and filing your exemption list. If you get it wrong, the consequences can range from uncomfortable to devastating.

Historically, self-represented cases have abysmal discharge (success) rates—in California, 63.8% of self-represented Chapter 7 cases received a standard discharge. Electronic self-represented (eSR) petitions for the same period had a success rate of 82.6%. Chapter 13 cases filed without an attorney generally do not receive discharges—if you're filing for bankruptcy it is best to have an experienced bankruptcy attorney helping you.