You won’t lose all of your property when you file for bankruptcy. Laws called “bankruptcy exemptions” allow you to protect property needed to maintain a home and employment after bankruptcy. This article explains how to determine what you can keep in a bankruptcy case and when you might lose property or have to pay to retain it.
Your Property in Bankruptcy
When you file for bankruptcy, you relinquish ownership of your property to the bankruptcy court, and it becomes part of what’s known as the bankruptcy “estate.” The bankruptcy trustee—the person responsible for finding funds to pay your bills—holds the property on behalf of your creditors.
What Property Is in the Bankruptcy Estate?
All of it. (Technically, a few exceptions exist, but because you’ll report all property in the same way, they’re virtually meaningless and add little to the discussion.)
When you file for bankruptcy, you’ll tell the court about your property by listing it on bankruptcy Schedule A/B: Property under property categories encompassing every property type you could own. Examples of the types of property you’ll list include:
- real estate (such as a residence, building, or land)
- vehicles (cars, vans, trucks, tractors, sport utility vehicles, motorcycles, watercraft, aircraft, motorhomes, ATVs, and the like)
- personal and household items (such as furnishings, electronics, collectibles, sports equipment, firearms, clothes, and jewelry)
- financial assets (bank, stock, and retirement account balances, business interests, legal claims, tax returns, and other monetary interests)
- business-related property (any property associated with a business, such as a restaurant oven or merchandise)
- farm- and commercial fishing-related property, and
- any other assets you own.
Listing Property Values in the Bankruptcy Petition
When you account for your property on Schedule A/B, you’ll also include the value of the asset. Not all property values are assessed in the same way, however. For example, you’ll use the “retail replacement value” (the amount of money needed to replace an item of the same age and condition) for household items and the “fair market value” (the price your home would bring on the real estate market) for property.
Can I Keep Some Property in the Bankruptcy Estate?
Bankruptcy law allows you to “exempt,” or take out of the bankruptcy estate, the things you need to maintain a home and job, such as household furnishings, clothing, and an inexpensive car. You can find out what you’ll be able to keep by checking the exemption statutes in your state.
What Property Can I Protect With Bankruptcy Exemptions?
Each state decides the assets residents can exempt in bankruptcy. Some states allow filers to use the federal bankruptcy exemptions instead of the state bankruptcy exemptions. You’ll choose whichever set protects more of your property.
Exemptions commonly cover the following property:
- homestead exemption (some or all of the equity in the home you live in)
- vehicle exemption (a small amount of equity in a car)
- household goods and furnishings (furniture, kitchenware, towels, bedding, garden tools)
- clothing
- tools of the trade (a reasonable amount of tools needed for your job), and
- most retirement accounts.
Whether you can keep other items, such as the money in your bank account, depends on your state. Some states have a “wildcard” exemption that allows you to exempt any property of your choice up to a certain dollar amount.
How to Claim Bankruptcy Exemptions
Exemptions aren’t automatic. You must list the property you’re entitled to exempt on Schedule C: The Property You Claim as Exempt. If you improperly exempt or can’t exempt property, what will happen to the property will depend on whether you file for Chapter 7 or 13.
In Chapter 7, the trustee sells nonexempt property and distributes the proceeds to your creditors. In Chapter 13, you keep the nonexempt property, but you must pay its value to creditors through Chapter 13 plan payments.
What Happens to Nonexempt Property?
The fate of your nonexempt property depends on the type of bankruptcy you file.
- Chapter 7 bankruptcy. If you file for Chapter 7 bankruptcy, the trustee will sell your nonexempt property and distribute the proceeds to your creditors. However, the trustee might let you buy back your motorcycle, boat, or any other nonexempt item if you can afford to do so. You can learn more about exempting property in Chapter 7 Bankruptcy Exemptions: What Can I Keep?
- Chapter 13 bankruptcy. You keep all property—both exempt and nonexempt—if you file for Chapter 13 bankruptcy. Of course, nothing in life is free and here’s the catch: You’ll have to pay your “unsecured creditors” or those whose debt isn’t backed by collateral an amount equal to your nonexempt property or more.
Because your case is unique, meeting with a bankruptcy lawyer is a good idea. A bankruptcy attorney can tell you which chapter will be best for you and what will happen to your property, as well as the cost of filing a Chapter 7 case versus the cost of filing a Chapter 13 matter.
Where Can I Find State and Federal Bankruptcy Exemptions?
You’ll find state bankruptcy exemptions and federal bankruptcy exemptions on Nolo.com. Because exemption amounts change, verifying amounts with a local bankruptcy lawyer is best.
Bankruptcy Court: Complete Bankruptcy Schedules Truthfully
It’s relatively common for people to want to keep exempt and nonexempt assets, and some might even entertain doing so, but it’s a bad idea. Simply put, the bankruptcy court is not the place to skirt the rules.
Trying to obtain property you’re not entitled to in bankruptcy—whether by hiding it, omitting it, or through any other means—constitutes fraud and can result in a fine of up to $250,000, imprisonment for up to 20 years, or both.
It’s also not a good idea to assume you won’t get caught. The bankruptcy trustee will review bank statements and other financial documents you’ll be required to turn over. Plus, there’s an incentive to comb carefully through your schedules. The trustee gets a percentage of any money found for your unsecured creditors or those you owe credit card debt, medical bills, and personal loans to, for instance.
The trustee can investigate property records if something seems wrong or order inspections of your home, business, storage space, and safe deposit box. If you bend the exemption rules, you can expect the trustee to file an objection and force you to prove that you’re entitled to the exemption in a hearing before the judge.