The concept of “nonexempt property” appears in the context of Chapter 7 bankruptcy proceedings and refers to property of the debtor’s estate that does not qualify for a statutory exemption. A debtor’s property is classified as nonexempt property “unless and until the debtor claims an exemption in some property, and then the property is only exempt to the extent of the value claimed or allowed; the exemptions do not operate automatically.” Nonexempt property may be taken by the trustee and liquidated for the benefit of the creditors. Such property may also be seized by the creditors in the event of a judgment against the debtor.
If property in a Chapter 7 proceeding has been exempted following the debtor’s claim of exemption, that property is “withdrawn from the estate for the benefit of the debtor” and the “[C]hapter 7 trustee cannot liquidate or distribute to creditors holding allowed claims.”
Section 522(b)(3) of the Bankruptcy Code provides that a debtor may elect to take advantage of either the exemptions found in section 522(d) of the Code or exemptions found in State or local law as well as federal non-bankruptcy exemptions. While State exemptions may vary, the federal bankruptcy exemptions, as well as those found in State law, generally have the goal of “help[ing] the debtor obtain a fresh start” by allowing him or her to "withdraw from the estate certain interests in property, such as his car or home, up to certain values.” As the Supreme Court noted, “Congress balanced the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors.”
Thus, exempted property, as described in section 522(d), can broadly be categorized as “necessities”, that will assist a debtor in “getting back on their feet.” Such exempted property could be either real property or personal property, such as motor vehicles up to a certain value or household appliances. However, the balance of interests relating to nonexempt property is such that the potential economic pain exacted upon the creditors if the property were exempted outweighs the benefit that exempting the property might have in allowing a fresh start for the debtor. Thus, property such as a second car or a collection of value items would likely be nonexempt property. As noted, if the debtor fails to file a timely list of exemptions, as prescribed in the Federal Rules of Bankruptcy Procedure Rule 4003, then all property in the debtor’s estate will be nonexempt property and subject to liquidation by the Chapter 7 trustee.
[Last updated in July of 2020 by the Wex Definitions Team]
