Bankruptcy is a process by which individuals can reduce or eliminate their debt. Bankruptcy is a decision that can affect an individual for many years, so it is important to consider the issues and outcomes that may occur from filing bankruptcy.
A bankruptcy can remain on an individual’s credit report for almost a decade. In addition, it may prevent the individual from obtaining lines of credit in the future. It is also important to consider what may occur with the individual’s property if they file for bankruptcy.
Can Property be Kept After Filing Bankruptcy?
For some individuals, filing for personal bankruptcy or consumer bankruptcy can help them obtain a financial fresh start. Many individuals believe that they will lose some or all of their property after a bankruptcy, but that is not necessarily true.
In most cases, an individual who files for bankruptcy may keep some of their property, depending on which type of bankruptcy they filed. In a Chapter 7 bankruptcy, an individual will forfeit the majority of their property in order to satisfy their debts. In a Chapter 13 bankruptcy, however, the individual will keep their property and establish a repayment plan.
Many individuals who file for bankruptcy can take advantage of the exemptions that permit them to keep certain items. This allows the individual to make a new start following the bankruptcy and repayment of debt.
Additionally, each state permits an individual to exempt a certain amount of equity in their personal property and their home. Whether or not the trustee in the individual’s bankruptcy case will sell their property depends on the amount of equity in the property as well as the state’s exemption laws. If an individual has no equity in their house or personal property, the trustee will not likely see it as profitable to sell them.
What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
There are two main chapters under which an individual can file for consumer bankruptcy. Those are Chapter 7 and Chapter 13. How much and what property is kept by the individual filing for bankruptcy will depend upon the type of bankruptcy that is filed.
A Chapter 7 bankruptcy, which is also called a liquidation bankruptcy, allows an individual to be relieved from all debt that is legally capable of being discharged. However, there are rules regarding who qualifies for a Chapter 7 bankruptcy, how to file, and what types of debts are eligible for discharge.
A Chapter 13 bankruptcy is a bankruptcy proceeding in which the individual will be required to repay most of their debts but they are permitted to keep property. Their remaining debts will either be discharged or repaid by the same of their property. A discharge of the debt means that the individual will no longer be legally obligated to pay back the debt.
What are Exemptions and Exclusions in a Bankruptcy?
Once an individual files for bankruptcy, their creditors are not permitted to attempt to collect on or collect on debts they are owed. The creditor is required to wait until the bankruptcy process is complete before attempting any collection efforts. The court orders an automatic stay at the outset of the proceedings, preventing creditors from taking actions.
An automatic stay is used for a couple of reasons. First, because the debt payments are often reorganized and reevaluated during a bankruptcy. Second, there are certain types of property that cannot be claimed by creditors in order to satisfy debts. This is known as exempt property. Other types of property can be reached by creditors, which is known as non-exempt property. Which property is considered exempt and which is considered non-exempt varies by state.
Property and items that are classified as exempt and non-exempt are called bankruptcy exemptions. Federal bankruptcy laws allow states to have discretion regarding which assets the debtor may keep when they file for bankruptcy. A state may allow the individual to choose between federally-created exemptions or state-created exemptions.
Some states only permit an individual to use the state-created exemptions. It is important to note that an individual who is filing for bankruptcy must choose between the federal or state exemptions and they cannot use both.
There are certain types of property that are exempt from a Chapter 7 bankruptcy, known as Chapter 7 exemptions. An individual’s assets will be totaled when calculating bankruptcy amounts. However, the individual may be permitted to keep a portion or percentage of those assets that are considered exempt from the proceeding.
Creditors cannot reach the amounts or property that are considered exempt. Chapter 7 exemptions may include, but may not be limited to:
- Necessary and essential items, including:
- furnishings; and
- household goods and appliances up to a certain amount;
- Equity in motor vehicles and other vehicles up to a certain specified value;
- Jewelry up to a certain value;
- Tools or instruments essential to an individual’s trade, up to a specific amount;
- Certain unpaid but earned wages;
- Retirement accounts including 401ks and pensions; and
- Benefits, including:
- social security;
- welfare; and
- unemployment, if the benefits are held in a bank account.
Examples of assets that are non-exempt for Chapter 7 bankruptcy purposes include, but may not be limited to:
- Bank account funds;
- Securities, including stocks and bonds;
- Valuable items, such as coin or stamp collections;
- Musical instruments, unless the individual’s profession is music;
- Second homes;
- Vacation property; and
- Second motor vehicles.
It is important to note that exempt and non-exempt property items may vary by state and by which statute the individual chooses, the federal or the state. Additionally, the amounts for the items will also vary depending on the same factors.
What Other Options do I Have for my Property After Bankruptcy?
In certain cases, it may be possible for an individual to buy back their property after a creditor has claimed it. This may occur if the individual has the resources since most creditors are not particularly concerned where the payments come from, so long as they are made.
This may be a good option especially if the property has a sentimental value. A second option if there are not enough exemptions available to protect an individual’s property from bankruptcy is to file for a Chapter 13 bankruptcy instead of a Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, an individual may keep all of their property including non-exempt assets. However, they will be required to pay their unsecured creditors an amount equal to the value of their non-exempt property.
Should I Hire a Lawyer for Help With Property and Bankruptcy Issues?
It is essential to have the assistance of an experienced bankruptcy lawyer for any property and bankruptcy issues you may have. Understanding how bankruptcy and property overlap may be confusing. You may not be aware of all of the different options that are available to you. A lawyer can review your situation, explain how bankruptcy will affect you, and assist you in filing if that is what you decided is best for you.
Your lawyer can review all of your property and explain what may be exempt and what may be non-exempt. You and your attorney can come up with a plan that best suits your needs and allows you to keep the property you desire while lightening your debt load.