Exempt property is property that cannot be taken by most creditors to satisfy the creditors’ claims against the debtor. Put simply, it is the property that the debtor can keep. All other property is non-exempt. The purpose of exemption law is to allow the debtor to keep those items of property deemed essential to daily life.
Exemptions are created by both state and federal law. As an example, under Arizona law, a debtor can generally exempt up to $150,000 of equity in his residence (the amount by which the value of the property exceeds the mortgage and other voluntary loans secured by the property). So, if a person filing for bankruptcy owns a $250,000 house with a $100,000 mortgage, his creditors, other than the mortgage company, cannot take the house to satisfy their claims. Another Arizona exemption allows a debtor to keep a car up to $6,000 in value. Yet another exemption, under federal law, allows a debtor to keep most pension and retirement benefits. Follow this link for a detailed list of Arizona bankruptcy exemptions.
There are two important caveats to keep in mind when discussing exemptions. First, an exemption cannot protect property from a creditor who holds a voluntary lien on the property. So, if you voluntarily grant a lien on your property to a creditor in order to obtain a loan, which is what happened if you have a mortgage on your house or obtained a loan to buy a car, then that creditor can take the property if you do not pay the debt. Second, many exemptions are limited in amount, like the car exemption discussed above. However, there are ways for a debtor to keep property even if its value exceeds the exemption amount, and an experienced bankruptcy attorney can advise you on how to accomplish this.