Your Property in Chapter 7 Bankruptcy

A fresh start in Chapter 7 bankruptcy involves more than erasing qualifying debt—you’ll need property to maintain a home and job, too. Here’s how to figure out what you’ll be able to keep.

Each state has exemption laws that protect particular types of property from creditors. The basics, such as household goods and furnishings, dishes, bedding, clothing, a modest car, some equity in your home (except for in a few states), and an ERISA-qualified retirement account will be safe from their reach. Don’t count on finding exemptions for luxury items, however, such as recreational vehicles, antiques, expensive collections, or extravagant artwork. However, some states give filers a wildcard exemption to use on whatever they choose.

Federal exemption laws exist, too. Each state decides whether a filer must use the state system, or whether the debtor can use the federal exemption scheme instead. If you have a choice, you’ll decide which exemption set will work best for you.

If you own all of your property outright, your analysis will stop here. But if you’re still paying for some of your property, and you put the asset up as collateral for the debt (creating a “secured debt”), you’ll want to familiarize yourself with a few more issues. If you’ve financed a home, car, jewelry, electronics, furniture, or an appliance, it’s likely a collateralized debt.

You can always give the collateral back to the lender and wipe out the responsibility to pay for it. But if you want to keep it, you’ll need to pay as agreed (or negotiate new terms). Otherwise, the lender can use its lien rights to seize it once the court lifts the automatic stay prohibiting creditor collections.

Some Chapter 7 filers with secured debt can also take advantage of the ability to avoid judgment liens, enter into a new “reaffirmation agreement” contract, or pay less than the balance owed through a lump sum “redemption” payment.