proceeds for damaged exempt property

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Proceeds for damaged exempt property are the insurance payouts or awards received as part of legal dispute regarding exempted assets in bankruptcy. When a person goes into bankruptcy, some essential assets are exempted from the reach of creditors to allow for the person to continue living. Federal and state laws vary, but if damage occurs to exempted property after petitioning for bankruptcy, the debtor may be allowed to retain insurance proceeds or settlement awards for the property. Regulations may not exempt proceeds for the damaged property if it exceeds the exemption amount under the statute. The exact treatment of proceeds for damaged exempt property depends on the type of bankruptcy. For example, while insurance proceeds likely would be exempted under Chapter 7 bankruptcy, they may not be exempted under a Chapter 13 bankruptcy because the lenders retain an interest in the assets (see In re Hoffmeister, 191 B.R. 875 (D. Kan. 1996)).

[Last updated in October of 2023 by the Wex Definitions Team]