The purpose of bankruptcy is to give someone overloaded with debt a fresh financial start, not to create a worse position. And if you had to repurchase all your belongings, you’d undoubtedly be in a tight spot. Fortunately, filing for bankruptcy doesn’t mean giving up everything you own. You can "exempt" or keep a reasonable amount of property you’ll need to work and live, such as household items, clothing, and your retirement account.
You might be able to protect other things, too, such as a portion or possibly all of the equity in your home. To find out exactly what you can protect, you’ll review your state’s exemption statute.
How Do You Protect Property in Bankruptcy?
Once you file, everything you own becomes part of what’s known as the bankruptcy estate. Each state decides the type and amount of property its residents can take—or exempt—from the bankruptcy estate. You’ll find the property you can exempt in your state’s exemption law.
Every state has its own exemptions, but some allow you to choose between the state list and the federal bankruptcy exemptions. In such states, you must select one list. You can’t choose exemptions from both.
Doubling Exemptions
If you file for bankruptcy with your spouse, you might be able to double the exemption amounts. You can double the federal exemptions. Many states allow you to double exemptions, but not all do. Even states that allow doubling might limit the assets you can double. For instance, many don't allow you to increase the homestead exemption when protecting equity in your residence.
What Happens to Nonexempt Property in Bankruptcy?
If you have property that you can’t protect with an exemption, the bankruptcy trustee—the court-appointed official responsible for overseeing the estate—sells it in a Chapter 7 case and distributes the funds to your creditors. It works a bit differently in Chapter 13. You keep the nonexempt property but must pay creditors its value (more below).
Property Most States Will Let You Exempt
Many people can keep all of the property that they own when they file for bankruptcy. You’ll likely be able to retain the following types of assets:
- furniture, kitchenware, and bedding
- clothing
- a small amount of jewelry
- tools of the trade (property you need for your work)
- ERISA-qualified retirement accounts
- a modest car, and
- some equity in your home.
This list is not exhaustive. Your state will likely provide additional property protection.
Property You Probably Won’t Be Able to Exempt
The point of keeping property in bankruptcy is ensuring you have what you need—not protecting luxury items. You should expect to surrender the following:
- exotic or expensive automobiles
- boats and other watercraft
- recreational vehicles and airplanes
- timeshares and vacation homes
- rental property
- valuable furniture and artwork, and
- investment and savings accounts.
If your state has a “wildcard” exemption—an exemption that allows you to keep any property of your choosing up to a certain dollar amount—you’ll be able to use it on a luxury item. For instance, most states don’t allow filers to keep valuable collectible items, such as a vintage doll or coin collection.
With a $10,000 wildcard exemption, you could keep your baseball card collection, an expensive set of skis, or anything else you like up to $10,000 in value, of course.
Where to Find Federal and State Exemptions
Exemptions aren’t automatic. If you don’t take steps to claim exempt property, you stand to lose it. You’ll find the exemption law by clicking on the following links:
You’ll list your exempt assets on Schedule C: The Property You Claim as Exempt. You’ll also be prompted to list the statute (law) enabling you to retain the asset in bankruptcy.
How Exemptions Work in Chapter 7 and Chapter 13 Cases
The type of bankruptcy chapter you file doesn’t change the amount of property you can exempt; it remains the same in both Chapter 7 and Chapter 13 bankruptcy. What’s different, however, is the treatment of your nonexempt property. Understanding these differences will help you determine the appropriate chapter for you.
Property in Chapter 7 Bankruptcy
The trustee will "liquidate" or sell any nonexempt property and distribute the proceeds to your unsecured creditors. An unsecured creditor (a credit card company, for example) differs from a secured creditor (a mortgage or auto lender). An unsecured creditor doesn’t have the right to take back your property, such as your car or home, if you don’t pay your debt.
The trustee doesn’t treat all unsecured debts the same but instead disperses funds according to the priority of the particular creditor. For instance, a past-due support obligation is higher in priority than an overdue tax debt, which has more priority than a credit card debt, a type of debt called a "nonpriority unsecured debt" that falls last on the list.
So, suppose the trustee gets $20,000 from the sale of your sailboat, and you owe $10,000 in child support, $15,000 in taxes, and $50,000 in credit card debt. In that case, the trustee would make the following distributions:
- $10,000 towards child support arrearages
- $10,000 for unpaid tax (leaving a $5,000 balance), and
- $0 for credit card debt.
Keep in mind that your case is unique. A bankruptcy attorney can review your situation and explain what will happen to your property and the cost to file for Chapter 7. Find additional information about Chapter 7 property exemption.
Property in Chapter 13 Bankruptcy
The trustee doesn’t sell your nonexempt property in a Chapter 13 case. You can keep all of it. But there’s a catch: You must pay your unsecured creditors the value of your nonexempt property or your disposable income—whichever is greater (secured creditors in Chapter 13 get paid differently).
Here’s how you’ll do it.
In Chapter 13 bankruptcy, you’ll start by exempting all property you’re entitled to protect, just as you would in a Chapter 7 bankruptcy case. Then, you’ll tally up the value of your nonexempt property.
You’ll need to pay at least that amount to your unsecured creditors over your three- to five-year repayment plan, but possibly more if your disposable income allows you to pay more. If you can’t afford a large monthly repayment plan payment, you can sell some of your nonexempt property yourself before Chapter 13 and use the proceeds for necessities.
This overview doesn't explain all that goes into creating a Chapter 13 plan, which is difficult without professional help. It’s strongly suggested that you consult a bankruptcy attorney who can explain your monthly plan payment and how much your Chapter 13 will cost.