When considering Chapter 7 bankruptcy, most people want to know if they can keep their property. The short answer is maybe. Chapter 7 bankruptcy is designed to wipe out your debts; but there is a catch. If you own too much property then the bankruptcy trustee may sell some of it and pay the proceeds to your creditors. So how much property can you keep? The answer is largely dependent on "exemptions."
What Are Bankruptcy Exemptions?
Congress realizes that you need certain things in order to make a fresh start after a bankruptcy. This is where exemptions come in. Exemptions allow you to keep some or all of your property in a Chapter 7.
How much property you can exempt differs depending on which state you live in. For example, if you own a car worth $5,000 and your state allows a $6,000 car exemption, then you can keep your car. However, if you live in a state that only allows a $2,000 car exemption (assuming no other exemptions are applicable) then the bankruptcy trustee may take your car and sell it. From the proceeds of the sale, the trustee will pay you the exemption amount of $2,000 and distribute the rest among your creditors.
Property Encumbered by a Secured Loan
If you own a house, car, or expensive household furnishings, chances are you had to take out a loan to purchase them. Your lender normally has a security interest in the property (this means that if you don’t make your loan payments it can repossess your car or furniture, or foreclose on your house). This security interest is not affected by the bankruptcy in most cases. Since bankruptcy does not erase security interests, the bankruptcy trustee is only concerned with how much equity (value of the property less the balance of the loan) you have in the property.
Each state allows you to exempt a certain amount of equity in your personal property (any property other than real estate) and your house. So whether a trustee will sell your property depends on the amount of equity you have in the property and your state’s exemption laws. If you have no equity in your house or personal property, you do not have to worry about the trustee taking them. However, if you wish to keep them you must continue making regular payments to your lender. Your lender may also require you to "reaffirm" your debt (sign a new agreement to make yourself personally liable again) in order to keep the property after bankruptcy.
Household Goods and Clothing
Your household goods and clothing are normally fully exempt in your bankruptcy because they usually have little resale value. However, if you do have individual items of high value and are not able to exempt them, then the trustee may try to sell them.
Money you have in qualified retirement accounts (which meet certain requirements to be tax exempt) are almost always fully exempt. Most retirement plans fit into this category so you will normally be allowed to keep all of your retirement savings. However, if it is not a true retirement account or if it is fraudulent, then the trustee can go after that money.
Money, Jewelry, and Other Property
Most states have exemptions that cover a certain amount of your personal property. Some have specific exemptions for items such as jewelry, and may even have a "wild card" exemption that can be used for any type of property. The amount of these exemptions depends on your state.
Will the Trustee Always Take My Property If I Don’t Have Enough Exemptions?
Even if you are unable to exempt all of your property, the trustee may still abandon it (decide not to sell) if it is not worth much. This happens if the costs associated with selling the property and the trustee's fee may mean that after the sale, there is little left for creditors. For example, if your car is worth $5,500 and your state only allows a $5,000 exemption for your car, the trustee will probably let you keep it because there likely won’t be anything left over after the cost of selling it.