Can you really keep everything you own if you file bankruptcy?
The Answer: Usually Yes.
1) Yes, usually you can keep those possessions that you own free and clear—meaning you don’t owe any money to a creditor which has a lien on those possessions.
2) Yes, usually you can keep those possessions which you don’t own free and clear—meaning you owe money to a creditor which has a lien on them—IF you want to keep them, AND are willing and able to meet certain conditions.
In today’s blog post we’ll address the first part of the above answer. We’ll get to the second part in the near future.
Keep What You Own Because of Property Exemptions, and Possibly Because of Chapter 13
Most people who file bankruptcy can keep what they own for two reasons: 1) property exemptions and 2) Chapter 13 protections. In a nutshell, property exemptions designate what types and amounts of assets you can keep; if you have any type or amount of property that isn’t covered, Chapter 13 adds an additional layer of protection.
The Core Principle of Chapter 7 Bankruptcy
In a Chapter 7 “straight bankruptcy,” your debts are discharged—legally written off forever—in return for you giving your unprotected assets to your creditors (as represented by the bankruptcy trustee). BUT, for most people, all or most of their assets ARE protected, or “exempt.”
As a result, debtors in Chapter 7 generally get a discharge of their debts without having to give any of their assets, or only a select set of assets, to the trustee.
Property Exemptions Aren’t As Simple As May Seem
- The Bankruptcy Code has a set of federal exemptions, and each state also has its own exemptions. In some states you have a choice between using the federal exemptions or the state ones, while in other states you are only permitted to use the state exemptions. When you have a choice, choosing which of the two exemption schemes is better for you is often not clear and you need an experienced attorney to help with this.
- If you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s exemption types and amounts can differ widely, thousands of dollars can be at stake depending on when your bankruptcy case is filed.
- Even once you know which set of exemptions apply to you, whether all of your assets are covered by an exemption and protected is often not clear. The exemption statues in many instances were written long ago using outdated language, often interpreted by the courts as to their current meaning. Plus the local trustees often have unwritten rules about how they interpret the exemption categories in practice. As a result, determining whether an asset is exempt or not involves much more than merely comparing a list of your assets against a list of the applicable exemptions.
So navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by your bankruptcy attorney.
If You Do Own Non-Exempt Assets
Most people who file a Chapter 7 bankruptcy case lose nothing to the trustee because everything they own is exempt. But what if you DO own one or more assets which do not fit any of the available exemptions? If you want to keep those assets, they can often be protected through a Chapter 13 case. We’ll cover that in our next blog post.