You'll likely be able to keep all or most property when filing for bankruptcy. Although many believe you lose all your belongings if you file for Chapter 7 bankruptcy, it isn't the case. Each state allows its residents to “exempt” or keep basic items, such as furniture, clothing, and an inexpensive car, using laws known as "exemptions."
What Happens to Property in Chapter 7 Bankruptcy?
You'll keep all property covered by your state's bankruptcy exemptions or the federal bankruptcy exemptions if you live in a state that gives you that choice and decide the federal bankruptcy exemptions will protect more property.
If you own nonexempt property, the bankruptcy trustee appointed to oversee your bankruptcy petition can sell it and distribute the proceeds to your creditors. However, if you want to keep an item of nonexempt property, there’s a good chance that the trustee will let you repurchase it at a discount.
Types of Property You Can Protect in Chapter 7
You will be able to keep at least some, if not all, of your property, depending on your state exemptions. Most states will allow you to exempt the following:
- a portion of the equity in your home
- a modest amount of equity in an automobile
- household necessities and clothing (including furniture, linens, dishes, garden tools)
- work tools (up to a certain dollar amount), and
- qualifying retirement accounts.
Other state-specific exemptions might allow you to protect items such as jewelry, a percentage of your wages, or a personal injury settlement.
How to Exempt Property in Chapter 7 Bankruptcy
Bankruptcy law requires you to tell the court about all of the property you own, without exception, and you’ll do so by disclosing your belongings on official bankruptcy form Schedule A/B: Property.
Because exempting property isn't automatic, you must list the law giving you the right to keep it on Schedule C: The Property You Claim as Exempt. Any property you fail to list on Schedule C is considered “nonexempt” property, and the bankruptcy trustee can sell it for the benefit of your creditors.
Where to Find Your State's Bankruptcy Exemptions
As a result, you must understand your state’s exemption scheme because making a mistake can be costly. You can find your state’s exemption statute in Keeping Property Using Bankruptcy Exemptions: You Don't Lose Everything. Also, a knowledgeable attorney can explain whether you can exempt everything you own and help you decide whether filing for Chapter 7 bankruptcy is the right option for you.
How to Keep a Financed House and Car
If you're still making payments on your house or car, you must do more than exempt the equity to keep it. You must be up-to-date on your payments and continue making payments after the bankruptcy case ends.
When you purchased your house or car, you “secured” the loan by agreeing to return the property if you failed to keep your balance current. If you’re behind on secured payments when you file for Chapter 7 bankruptcy, a creditor can ask the court to lift the automatic stay, the order preventing creditors from collecting against you, and allow the bank to proceed with foreclosure or repossession. Even if the lender doesn't ask the bankruptcy court to lift the stay, the creditor can continue with foreclosure or repossession after the closure of the case.
When you’re behind, filing for Chapter 13 bankruptcy can be a better choice because you can catch up on your payments over a three- to five-year repayment plan. In many instances, your monthly car payment will be lower because you can spread your remaining car balance arrearages over your entire repayment period.
Buying Back Your Nonexempt Property
Although many people can keep all their property in their Chapter 7 bankruptcy, this isn’t always the case. Bankruptcy protects the fundamental things people need to maintain a household and job—not luxurious extras, such as a vacation home or an expensive cigar collection. Here are common examples of nonexempt property that you can expect to give up:
- vintage cars and motorcycles of all types (but if it’s your only vehicle, you can use your exemption on it—the point is that you shouldn’t plan to keep multiple vehicles)
- boats and recreational vehicles
- rental property and timeshares
- business merchandise and fixtures
- shares of stock and interests in LLCs, and
- artwork and other collectibles.
If your state exemption scheme doesn’t allow you to exempt an item you want to keep, all is not lost. The bankruptcy trustee often lets you buy back the item at a slight discount.
Learn more about the steps involved in filing a Chapter 7 bankruptcy case.
Consult a Bankruptcy Attorney
Getting legal help isn't as expensive as you'd think, and most people believe hiring a bankruptcy lawyer is well worth the cost. Preparing before meeting with a bankruptcy lawyer is a good idea to ensure you fully understand your options before filing for bankruptcy.