Most of us are aware that in a bankruptcy case, some or possibly even all of your property and possessions can be claimed exempt. Such property is protected from being taken by your creditors, or by the trustee, in your bankruptcy. Congress allows use of exemptions to enable individual bankruptcy debtors to obtain a fresh start, rather than forcing them to start over with nothing after bankruptcy.
While most are aware that property claimed as exempt is exempt forever from the bankruptcy case, it is important to remember that exempt property is also forever exempt from the future claims of creditors who were not discharged in the bankruptcy, by virtue of section 523(c) of the bankruptcy law.
This means that property claimed exempt can never be taken later by a creditor who was listed in the bankruptcy, even if that creditor’s claim or debt was not discharged. Exemptions, then, are forever.
To illustrate how important this can be, let’s imagine a bankruptcy case in which the debtor owns a 2004 Chrysler minivan worth $10,000. The minivan has no loan against it. The debtor claims the minivan exempt pursuant to federal bankruptcy section 522(d)(5) in the amount of $10,000; therefore the minivan is fully exempt in the bankruptcy and the debtor gets to keep it.
Let’s say the debtor also had a credit card debt of $5,000 incurred in the two months before the bankruptcy was filed. The creditor filed a complaint in bankruptcy court, and the debt was not discharged, although all the debtor’s other debts were duly discharged.
Even though the credit card bank has a judgment against the debtor for the $5,000 debt which survived the bankruptcy, the bank can never levy on the minivan, because section 523(c) says that exempt property is forever exempt from claims of creditors listed in the bankruptcy. This true whether the creditor’s claim was discharged or not.
This would be particularly important if the debtor lives in a state that has no state law motor vehicle exemption, or has a motor vehicle exemption insuffient to protect the entire value of the debtor’s minivan. Section 523(c) would nevertheless protect the minivan, because it was exempt in the bankruptcy case.
However, the protections of section 523(c) do not extend to some tax debts, child support or spousal maintenance, or student loans obtained by fraud.