Many people worry that they will lose everything they own after they file bankruptcy. In reality, most people can keep most of their property and many people keep all of their property. The property you keep depends upon the kind of bankruptcy you file and the state in which you live.
Chapter 13: You Keep Everything
Chapter 13 of the Bankruptcy Code allows you to repay all or a portion of your debt under court supervision. You propose a plan to the Bankruptcy Court that allows you to make regular payments to a bankruptcy trustee. Those payments are used to satisfy your creditors. As long as you make the required payments and satisfy the court that you are making your best effort to pay your debts, you keep all your property. In most cases, you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy and cover any arrears through the plan.
If you have secured property that you don’t want to keep and pay for you can turn the property over rather than include it in your Chapter 13 plan.
Chapter 7: You Keep Unsecured Property that is Exempt
Chapter 7 of the Bankruptcy Code liquidates (or wipes out) all of your debt. As soon as you file your petition, your property becomes part of your “bankruptcy estate.” The trustee can sell any nonexempt property in the bankruptcy estate and use the proceeds to satisfy your creditors.
Both state and federal law itemize the property that is exempt. In some states, you are allowed to choose between the state and federal exemptions. In other states, you are required to use the state exemptions. If you are given a choice, your bankruptcy attorney can help you decide whether you should claim the state or the federal exemptions. You must declare your choice and identify your exempt property in the chapter 7 petition that you file with the court.
Some states are more generous with their exemptions than others, but in nearly every state you are entitled to keep household goods, clothing, and personal effects of ordinary value. You can usually keep the equity in your home up to a certain dollar value, and in some states you can keep your home regardless of its value, even if you own it free and clear. Nearly all states will let you keep a certain amount of cash, including bank deposits, and one or more vehicles up to a specified value. You can keep the wages you earn after filing your chapter 7 petition. With rare exceptions, you can keep your retirement accounts and pension funds, as well as your right to receive disability payments. In addition, many states give you a “wildcard” exemption of a certain dollar value that can be applied to any property you designate.
Nonexempt Property in Chapter 7
Even if property is not exempt, the trustee might decide not to sell it. The trustee might “abandon” property if it has a low value or if selling it would be too much trouble. Keep in mind the value of property is not the amount you paid for it, but what it is worth now. Generally the trustee is interested in the resale value of your property so, as an example, for most personal effects this is the garage sale value of your property.
In some circumstances, if retaining ownership of a particular piece of property is important to you, it might be possible to buy it back from the trustee for a negotiated price, or to trade it for exempt property of similar value. Your bankruptcy attorney can help you negotiate with the trustee.
Secured Property in Chapter 7
If you borrowed money that you used to purchase property and you gave the lender a security interest in that property — for instance, a mortgage on your home or a lien on your vehicle — you might be required to surrender that property to the lender after you file a chapter 7 bankruptcy.
When it comes to secured property, you need to look at your equity in the property. This means that you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a $50,000 house with a $40,000 mortgage, you count your exemptions against the $10,000 equity you have in the home.
While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to repossess the property to cover the debt if you are behind. It may be possible for you to keep the property, however, if you are able to “reaffirm” the debt by negotiating new payment terms with the lender or by paying the lender the market value of your property.