Many people are concerned about what they may lose if they file for bankruptcy. Rightly so, you are essentially under the rights of the court when you file bankruptcy and federal and state laws. The federal and states work together through bankruptcy exemptions that help determine what you can keep and what you can lose.
So, here’s a list of items that you could lose:
- Personal Property
- Tools of Trade
BUT, the state or federal bankruptcy exemptions may be able to help you protect some or all of your belongings. 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.
What Do You Want to Lose When 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 those debts so that you never need to worry about the debts again. Of course, some debts are not dischargeable in bankruptcy, so how much debt you stand to “lose” depends on the types of debts you owe.
Another thing that you might want to lose when filing bankruptcy is the stress of dealing with debt problems. Debt problems can cause health problems, arguments between partners, and other negative consequences. Bankruptcy can wipe the slate clean and give you a fresh start, which is a huge emotional relief.
Do you lose your car if you file for bankruptcy?
Believe it or not, some people want to “lose” their homes or cars in bankruptcy. They are upside down on their mortgage or car loans. If they tried to sell their home or car to get out from under the death, 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 one more cent on the loan, regardless of how much money is owed to the account after the home or car is liquidated (sold by the creditor).
What Do You Not Want to Lose When You File Bankruptcy?
Losing property is one of the biggest fears most people have before filing bankruptcy, especially a Chapter 7 bankruptcy case. However, the vast majority of bankruptcy cases filed throughout the United States do not result in the loss of property. Losing a piece of property can happen, but it is not the norm.
As discussed above, some individuals voluntarily surrender property through their bankruptcy case to avoid paying the 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.
Why Would You Lose Property When You File Bankruptcy?
In a bankruptcy case, you protect your property with bankruptcy exemptions. Check the specific bankruptcy exemptions for your state. When Congress created the Bankruptcy Code, it understood that a person needs to have basic 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.
Federal Bankruptcy Exemptions vs. State Bankruptcy Exemptions
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.
Another property has maximum amounts for exemptions. 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. The next revision is scheduled for April 1, 2022.
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 property in bankruptcy.
How Do Bankruptcy Exemptions Protect My Property?
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:
- How Does the Bankruptcy Homestead Exemption Work?
- How Much Cash Can You Keep in Chapter 7 and Chapter 13
- Keeping Your House in Bankruptcy
- How To Keep Your Car After Filing Bankruptcy
- Should I Use My 401 (k) or IRA To Pay Off Debt?
States may adjust bankruptcy exemptions periodically for inflation as well. If you are concerned about losing property in bankruptcy, talk with a bankruptcy lawyer near you about your situation.
Are you at risk of losing items?
Hopefully, this article allows you to understand the risk of losing items in a 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, contact Ascend by calling 833-272-3631. 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 wellbeing.