Here are some assets you may lose when you file for Chapter 7 bankruptcy:
However, the state or federal bankruptcy exemptions may be able to help you protect your assets. The state's bankruptcy exemption laws are confusing, so we parsed through your state's exemption laws to put together this free resource below to estimate what you will lose if you file bankruptcy.
The goal of filing bankruptcy is to eliminate debts you cannot pay. In other words, you “lose” the legal liability to repay those debts. The bankruptcy discharge forgives unsecured debts so you do not have to pay them. Of course, some debts are not dischargeable in bankruptcy, so be sure to talk to an attorney if you are filing.
Bankruptcy may be a great way to have a clean slate or fresh start. If you feel overwhelmed and drowning in debt, bankruptcy might be a great option to look into.
A quick rundown of Chapter 7 bankruptcy:
Chapter 7 is the cheapest and fastest option with attorney fees ranging from $1,000-$2,500 and it takes 3-4 months. It is liquidation bankruptcy so it will try to liquidate your high-valued assets, such as your house and car, before it wipes away the debt. (Note: liquidate means to sell by the creditor). However, the assets may be protected depending on the equity, having a current car loan, and the state exemptions. It will be on your report for 10 years. You do have to qualify for Chapter 7 and it's based on household gross income before taxes. It gives full legal protection.
Some people want to “lose” their homes or cars in bankruptcy. For example, they may be upside down on their mortgage or car loans, meaning they owe more than it’s worth. If they tried to sell their home or car to get out of the debt, they would have to pay money to get rid of the property.
Through a Chapter 7 bankruptcy case, they can surrender the home or car to the creditor without fear of a deficiency judgment. They will not have to pay any more on the loan, regardless of how much money is owed to the account after the home or car is liquidated.
The majority of bankruptcy cases filed throughout the United States do not result in losing property. Losing property can happen, but it is not the norm.
As discussed above, some individuals voluntarily surrender property through their bankruptcy case to avoid debt payments. This scenario of losing property when you file bankruptcy is far more common than the Chapter 7 trustee seizing property to sell at a bankruptcy auction.
When filing for bankruptcy, you may protect your property using federal or state exemptions. Check the specific bankruptcy exemptions for your state. When Congress created the Bankruptcy Code, it understood that a person needs to have the necessities to survive.
If you strip a debtor of all of his or her property, you make it impossible for that person to recover after a financial hardship. The purpose of bankruptcy is to forgive debts so that the person has a fresh start to rebuild finances. Ensuring that the person has basic needs is part of that fresh start.
Most of the federal bankruptcy exemptions are listed in 11 USC §522. The code section lists the property that is exempt from being used to repay debts in Chapter 7 or Chapter 13 bankruptcy cases. Some property has unlimited exemptions, meaning that the property is protected regardless of its value. An example would be funds held in most retirement accounts and pension funds.
In the exemptions, property may have a maximum amount of worth or equity that can be protected. For example, the maximum exemption for a motor vehicle is $4,000, and the maximum exemption for jewelry is $1,700. NCLC has a list of some of the most common federal bankruptcy exemptions on its website. The federal bankruptcy exemptions are revised for inflation every three years.
Most states also have bankruptcy exemptions. You must reside in a state for at least 730 days before filing bankruptcy to be eligible to use state bankruptcy exemptions. Some states give debtors in bankruptcy the option to choose between federal and state bankruptcy exemptions. Other states require debtors who have lived in the state for at least two years to use state bankruptcy exemptions.
While most states have better exemptions than federal exemptions, that is not always the case. A bankruptcy lawyer can help you evaluate your property to make sure that you maximize the available bankruptcy exemptions to protect your property in bankruptcy.
The exempt equity in the property cannot be used to pay your creditors in a bankruptcy case. Let’s use a vehicle as an example.
Your car is worth $25,000. However, you owe $21,000 on your car loan. Therefore, the net equity in the vehicle is $4,000. The federal bankruptcy exemption is $4,000. Therefore, there is no equity in the car for the trustee to use to pay your creditors.
The above example is a quick, straightforward example of how bankruptcy exemptions prevent you from losing property when you file bankruptcy. We have articles that explain bankruptcy exemptions in greater detail available free of charge on our website. For more information about bankruptcy exemptions, consider reading:
States may adjust bankruptcy exemptions periodically for inflation as well. If you are concerned about losing property in bankruptcy, talk with a local bankruptcy lawyer about your situation.
Hopefully, this article allows you to understand the risk of losing property in bankruptcy and what the specific risk is in your situation. Feel free to take the free bankruptcy exemptions calculator below to help you estimate the risk of losing items.
If you have questions about debt relief or want to talk with someone now, feel free to contact us by calling 310-307-5134. We want to help you choose the best debt relief option for your situation so that you can get started on the road to financial well-being.
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