A common fear leading up to bankruptcy for most clients is Can you keep your property through a Chapter 7 bankruptcy? The answer is somewhat complicated and the short answer is: Maybe, depending on your situation.
This is what something called “ exemptions" are for. The way I explain it to clients is this: When you file for bankruptcy, something called the “ bankruptcy estate" is created, kind of like the estate that is created when someone dies. Everything in the that estate temporarily comes under the Chapter 7 trustee‘s control. The trustee can sell estate assets to pay off your creditors. If something is NOT in the bankruptcy estate, it will not come under the trustee’s control.
How do you keep your stuff out of the bankruptcy estate? You list all it in your filing. Then you cite to the statutes allowing you to exempt each item from the estate. Only property that is listed can be exempted. So if you fail to include property, the property will not be exempt, period. The laws allowing you to keep property out of the bankruptcy estate are generally called “exemptions". Exemptions are limited but for most people filing a Chapter 7 bankruptcy, the exemption limits are enough to protect most, if not all, unsecured assets.
Exemptions are limited by both type of property and by amount. For example, you might find that the statute that applies to jewelry might be limited in amount to $1500. This means you could exempt only $1500 worth of jewelry from your bankruptcy estate (each state may vary its exemption amount, do not take this amount as a hard rule). Limitations like this can make it difficult (and sometimes impossible) to exempt very valuable items like real estate, newer cars, or valuable collectors’ items.
If you do happen to have more property than your exemptions allow, you get to pick what is exempt and will be sold.If you run out of exemptions a few different things might happen. If the asset has value, the bankruptcy Trustee can sell it and distribute the proceeds to your creditors. If the asset has no or minimal sale value (family photos, a 1983 Honda with 300,000 miles or an old stained couch) or has no equity (a car or house that’s worth less than the loan you have on it) you usually can keep it if you can continue to make payments on it. Even if an asset has value, the Trustee may decide that selling it is more trouble than it’s worth, or won’t bring in enough to justify the effort to sell it, and will allow you to keep the property.
Some property is completely exempt regardless of value. Government benefits such as unemployment, social security and Medicaid/Medicare are completely exempt. Most importantly, retirement accounts are completely exempt in a bankruptcy because the government wants you to retire on your own dime. If you are thinking about draining your retirement accounts to pay debts, don’t. Filing a bankruptcy before draining your accounts will save you every penny of your retirement money.
How do you value your items? Generally speaking, you value your property by determining its resale value – how much could you get for it at a garage sale or on an auction website?
A Chapter 13 bankruptcy, however, is different than a Chapter 7. In a Chapter 13, the Trustee with the help of the debtor’s attorney, will negotiate a payment plan over a 3 to 5 year period in which your secured debt (such as a home with a mortgage, or a car still owing) are paid off, plus some unsecured debt if there is money left over. In a Chapter 13 you are still permitted to keep enough of your wages to pay for reasonable living expenses, and can keep all your property if you can pay for it.
It’s a good idea to speak to a bankruptcy attorney in the state where you live to find out what the exemptions limitations are. Don’t make the mistake of transferring property to someone else just to keep it out of the bankruptcy estate.