When you file a bankruptcy petition ALL of your property becomes property of your 'bankruptcy estate'. Exemptions are what the bankruptcy code allows you use in order to KEEP or PROTECT certain property.
In the context of a Chapter 7 bankruptcy, any non-exempt property is subject to liquidation by a Chapter 7 Trustee (the party who appointed by the Court to convert all non-exempt property to cash for the benefit of your creditors).
A common question that I'm asked by a perspective client is 'can I keep this?' or 'can I keep that?'. The answer is 'that depends'. More often than not the answer is 'yes' - as the exemptions afforded under the bankruptcy code are fairly generous. In cases where certain assets may be at risk an experienced bankruptcy attorney may help you do some exemption planning or instead steer you towards Chapter 13 instead of Chapter 7.
Chapter 13 is a non-liquidating form of bankruptcy. What happens to non-exempt property in a Chapter 13? You keep it - however a certain amount of your unsecured debt may need to repaid over time instead. An experienced bankruptcy attorney can help you determine how much.
Another thing to ask your bankruptcy attorney about is which exemption scheme is most beneficial to use in your case. In cases filed in Michigan - debtors have the option of choosing the Federal exemption scheme or the State of Michigan exemption scheme.
When somebody elects to file their own bankruptcy petition without the assistance of an attorney - failing to exempt property is one of the most common pitfalls. This can result in property that could have been protected - if it had been properly exempted - being seized by a Chapter 7 Trustee instead.