Property and Exemptions in Bankruptcy

Filers don’t lose everything in bankruptcy. But maintaining a lavish lifestyle won’t be on the table, either. Here’s what you can expect:

• You’ll likely come out of bankruptcy with household goods and furniture, clothing, a modest car, and an ERISA-qualified retirement account.
• You might be able to keep your home.
• It’s unlikely that you’ll be able to protect much cash, money in a bank account, or luxury items.

So how will you know what you can protect? Figuring it out is a multi-step process.

Start by learning about your state’s exemption laws—the laws that tell debtors what they can protect from creditors. Exemptions vary widely between states. For instance, exemptions in rural communities might protect farmland, livestock, feed, tractors, and other farming equipment. Other states might allow filers to exempt a sizeable amount of equity in a home or offer a significant wildcard exemption—an exemption you can use toward any property of your choice.

A federal exemption set exists, too, so check whether your state gives residents the option to use the federal scheme instead of the state set. Then determine which exemption set will let you protect the most property (you must choose one and stick with it).

If you have nonexempt property—assets that you can’t protect with an exemption—find out what will happen to it. Typically, the Chapter 7 bankruptcy trustee sells nonexempt property and distributes the proceeds to creditors—but you might be able to repurchase the asset at a discount. The Chapter 13 trustee doesn’t sell property. Instead, you must pay an amount equal to the nonexempt value through your repayment plan. If you can’t afford the required payment, consider selling it yourself or returning it to the lender.

If you’re still paying for property you’d like to keep, and it’s serving as collateral for the debt—which is typical when purchasing a house, car, jewelry, furniture, or electronics—you’ll have other hurdles to meet. You’ll want to be current before filing for Chapter 7 and have enough income to make the regular payment and catch up on arrears in Chapter 13. Otherwise, the lender could seize the property.

Finally, you’ll want to learn about the ways to reduce the amount owed on the financed property, such as Chapter 7 redemption and reaffirmation options, and Chapter 13 cramdown and lien-stripping procedures.

The bottom line is that no one wants to lose valuable property, and reading the articles below is a good place to start. However, the laws can be complex, and an experienced bankruptcy lawyer will be in the best position to help you navigate the bankruptcy process.