Legal Definitions - proceeds for damaged exempt property

Proceeds for damaged exempt property refers to money a person receives as compensation when property that would normally be protected from creditors in a bankruptcy case (known as "exempt property") is damaged, destroyed, or lost. This compensation can come from various sources, such as insurance payments, a legal settlement, or an arbitration award. The law allows these funds to retain the same exempt status as the original property, up to the value of the original exemption, ensuring that the debtor doesn't lose their protected assets simply because they were converted into cash due to an unforeseen event.

• Example 1: Tools of the Trade

  A self-employed carpenter owns a set of specialized power tools, valued at $4,000, which are considered "tools of the trade" and are exempt under state law up to $5,000. During a workshop fire, these tools are completely destroyed. The carpenter files an insurance claim and receives a $3,800 payout for the lost equipment.

  In a bankruptcy proceeding, this $3,800 insurance payout would be considered "proceeds for damaged exempt property." Because the original tools were exempt, the money received to replace them also retains that exempt status, preventing creditors from claiming it.

• Example 2: Motor Vehicle Exemption

  A debtor owns a car valued at $7,000, and their state allows a motor vehicle exemption of up to $4,000. The car is involved in a serious collision and is declared a total loss. The debtor receives a $6,500 settlement from the at-fault driver's insurance company.

  Even though the car itself is gone, $4,000 of the $6,500 settlement would be considered "proceeds for damaged exempt property." This means that portion of the cash settlement is protected from creditors, just as the first $4,000 value of the car was before the accident.

• Example 3: Personal Property Exemption

  A family's home experiences a severe flood, which destroys their living room furniture and appliances, items that fall under a general household goods exemption up to $3,000. Their homeowner's insurance policy pays them $2,800 to cover the cost of replacing the damaged items.

  In a bankruptcy filing, this $2,800 insurance payment would be treated as "proceeds for damaged exempt property." Since the furniture and appliances themselves were exempt, the funds received to replace them are also protected from creditors, allowing the family to use that money to restore their household.