Knowing which assets are off limits to creditors and then organizing your property to safeguard them from loss is the cornerstone of asset protection planning. Asset exemptions were designed to ensure that families could provide for their basic needs in the face of a financial crisis. The federal bankruptcy statute has a list of exempt assets. States vary on their generosity with asset exemptions and, in the event of bankruptcy, some states allow you to choose between applying state or federal exemptions.

While there are many factors which determine the specific exemptions that are available to you, certain categories of exemptions are addressed by all states:

Homestead Exemption

Protects a personal residence from claims of creditors. More debtor-friendly states offer an unlimited dollar value for the homestead exemption. A few states provide no specific homestead exemption at all, but most place a dollar cap on the homestead exemption and a limit to how much adjacent land is protected. Generally mortgages cannot be eliminated even when they are for exempted property.

The Bankruptcy Reform Act of 2005, which goes into effect October 17, 2005, has revised the federal homestead exemption:

• A debtor's residential homestead is only exempt if their local State law exempts it.
• Interest in a home in excess of $125,000 is only exempt if the interest was acquired 3 years 4 months (1215 days) prior to the bankruptcy filing.
• A debtor can rollover the equity in a former home into a new residence without triggering the 3 year 4 month period if the both homes are within the same State.

Retirement Plans

In many states ERISA-qualified retirement funds are exempt only because of federal court decisions and are not included in State law. The Bankruptcy Reform Act of 2005 further clarified federal bankruptcy exemptions. It excludes amounts withheld from wages for contribution to a government sponsored employee plan, deferred compensation plan, deferred annuities and health insurance plans regulated by State law. Also, IRAs up to $1 million are exempt and an unlimited exemption applies to Rollover IRAs, SEP IRAs and Simple IRAs.

Wages

Federal law overrides state laws and exempts 75 percent of a debtor's disposable income. Federal law also includes a minimum weekly wage exemption of 30 times the current federal hourly minimum wage.

Annuities

Many states exempt annuities, generally limited to a fixed dollar amount per month. Federal bankruptcy provisions provide for disability, illness or unemployment benefits and, with certain restrictions, life insurance policies.

Wild Card Exemption

Many states offer a wild card exemption to protect various types of personal property generally in small, specific dollar amounts. Some states also allow you to apply an unused homestead exemption as a wild card exemption.

The federal bankruptcy exemption is $925 of any property and $9,250, less any amount of homestead exemption claimed, of any property. Various specific categories are protected in various amounts including health aids, alimony, child support, social security, unemployment compensation, veteran's benefits, personal injury recoveries and lost earnings payments.

Tools of the Trade

Tools of the trade include assets reasonably necessary to conduct a business. Since exemptions are only available to natural persons and not corporate entities, assets owned by your business are not exempt, however, other types of structuring can often protect business assets. The federal Tools of the Trade bankruptcy exemption is $1,850.

Household Goods

Household goods' exemptions generally involve subcategories that vary from state to state. In some states there are no dollar caps under the categories and in stricter states proof is required that items qualify as basic necessities. What qualifies under both the Household Goods and the Tools of the Trade exemptions is often subject to court interpretation.

Generally there is no specific exemption for an owner's interest in a business, however, some states allow it to be protected under a wild card exemption. Certain other exemptions are available in addition to your state's exemptions, but cannot be claimed if you use federal bankruptcy exemptions. These include certain retirement and survivor's benefits and death and disability benefits.

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