Understanding the Use of the Term Exemption in Bankruptcy


Understanding bankruptcy law is all about communicating in legal terms so every party to the issue can fully comprehend. A problem in understanding bankruptcy law often can arise for the average layman not familiar with bankruptcy terms, both used legally and colloquially. Understanding the use of the term “exemption” in bankruptcy is a good example.


The Term Exemption Used in Bankruptcy Law


In federal and state bankruptcy laws, the term exemption is used in primarily two different ways:


  1. Exemption of Assets- In the bankruptcy process, all assets of the bankruptcy estate are determined by federal and state bankruptcy laws to be either exempt or non-exempt in regards to liquidation. Any exemption of an assets, including equity, is determined by bankruptcy laws and 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 off debts owed by the bankruptcy estate. By making certain assets exempt from bankruptcy liquidation, a filing debtor has a better opportunity to get a fresh financial start, the purpose of filing bankruptcy in the first place.

  2. Exemption of Debts- In the bankruptcy process, there are debts that can be discharged and there are debts prescribed by bankruptcy laws that can never be discharged. Non-exempt debts can be discharged in all bankruptcies under certain legal conditions. One of the purposes of the bankruptcy courts is to rule on which and how much non-exempt debts can be discharged in a bankruptcy proceeding.

    Debts that are exempt from discharge in bankruptcy are described by federal bankruptcy laws. There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions applies to cases under chapter 13.


The Term Exemption Used Colloquially


The term exemption can be understood in its legal connotation by any layman willing to dig up the information for themselves or hire a bankruptcy attorney for their expertise within the bankruptcy system. Most colloquial use of the term must be learned.


The term exemption can be used in tax circles, in filling out paperwork for almost any government entity, and it can include a wide variety of uses that reflect special circumstances you may find yourself in legally or otherwise. The term, unfortunately for filing debtors, is not necessarily germane to the bankruptcy system.


To compound the problem with understanding the use of the term exemption in conversation, each state has their own allowable bankruptcy exemptions laws. State exemptions laws have evolved through time to reflect the needs and desires of the citizens within each state. Therefore, local terms can often be misunderstood by other people living outside a particular geographic area in which the meaning of a particular concept has evolved.


In addition, bankruptcy courts are given a certain amount leeway in order to administrate bankruptcy laws, which means it is very important for a filing debtor to understand bankruptcy terms and how they might apply in a given bankruptcy court district. It is also the reason a filing debtor might want to choose a bankruptcy attorney that has working experience within the district in which they will file.





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