Can Exemptions be Denied in a Bankruptcy Case?

Under chapter 7 bankruptcy, rules for exemptions become important because all property that isn't exempt can be seized and sold during the bankruptcy proceedings. Under Section 6 of the Bankruptcy Act, property that is transferred or concealed before bankruptcy can result in bankruptcy discharge denied exemptions. If the bankrupt individual is guilty of fraudulent activity, then exemptions can also be denied.   It is solely up to the bankruptcy court to decide whether or not to deny exemptions.

Bankruptcy Exemptions

There are several different classes of exemption in most states, but the rules can vary.  For example, in California exemptions include:

• Homestead, 
• Lien avoidance and 
• Retirement accounts/life insurance/annuities.  

While other district bankruptcy courts may have similar policies regarding bankruptcy exemptions, the state of California clearly outlines and provides these particular examples for their residents.

While you can claim these exemptions if you do things properly, an exemption can be denied if a bankrupt individual tries to hide an asset or commit fraudulent activity regarding the exemption. For example, the act of transferring or concealing assets (like moving more money into a retirement account just before declaring bankruptcy) will inevitably result in that exemption being denied in a bankruptcy case.  As such, it is extremely important to be honest with the bankruptcy court so that none of your exemptions get denied. Other rules may exist as well to protect creditors and deny exemptions. For example, the state of Florida has made it common practice to deny wage exemptions to self-employed debtors.  This is because individuals who own S-Corporations tend to pay themselves twice – once as an employee and once as an owner of the corporation.  In some cases questionable activity may occur on behalf of the debtor, such as an over or increased compensation of wages in mere months preceding their bankruptcy.  This act alone weighs heavy on the court’s decision to deny exemptions. Due to the dual compensation and possibility of fraud, the Florida bankruptcy courts have made it crystal clear that such self-employed individuals will be denied wage exemptions.

Getting Help

Regardless of the state that you live in you will definitely need to retain a lawyer if you are considering declaring any chapter of bankruptcy.  Since each state has different provisions regarding denying exemptions in the bankruptcy process, a bankruptcy attorney will better be able to assist you with ensuring you do not do anything to jeopardize the exemptions that may be available to you in a bankruptcy filing.