It’s a common misconception that you’ll lose all your belongings if you file for Chapter 7 bankruptcy. It isn’t true. Each state allows its residents to “exempt,” or keep, basic items, such as furniture, clothing, and an inexpensive car. In fact, most people can keep all of their property under their state exemption statute. If you own nonexempt property, the bankruptcy trustee (the person who oversees your bankruptcy petition) can sell it and distribute the proceeds to your creditors. However, if you want to keep an item of nonexempt property, there’s a good chance that the trustee will let you buy it back at a discount.
Property You Can Exempt
Bankruptcy law requires you to tell the court about all of the property you own, without exception, and you’ll do so by disclosing your belongings on official bankruptcy form Schedule A/B: Property. You will be able to keep at least some, if not all, of your property, depending on your state exemptions. Most states will allow you to exempt the following:
- a portion of the equity in your home
- a modest amount of equity in an automobile
- household necessities and clothing (including furniture, linens, dishes, garden tools)
- work tools (up to a certain dollar amount), and
- qualifying retirement accounts.
Other state-specific exemptions might allow you to protect items such as jewelry, a percentage of your wages, or a personal injury settlement.
How to Exempt Your Property
Keeping exempt property is not automatic. To protect your exempt property, you must list it on Schedule C: The Property You Claim as Exempt. Any property that you fail to list on Schedule C is considered “nonexempt” property and the bankruptcy trustee can sell it for the benefit of your creditors. As a result, it’s imperative that you understand your state’s exemption scheme because making a mistake can be costly. You can find your state’s exemption statute by reading How to Find Your State Bankruptcy Exemptions. As well, a knowledgeable attorney can advise you about your exempt property and help you decide whether filing for Chapter 7 bankruptcy is the right option for you.
How to Keep Your House and Car
To keep your house or car, you must be up-to-date on your payments. When you purchased your house or car, you “secured” the loan by agreeing to give the property back if you failed to keep your balance current. If you’re behind on secured payments when you file for Chapter 7 bankruptcy, a creditor can ask the court to lift the automatic stay (the order preventing creditors from collecting against you) and allow the bank to proceed with foreclosure. The bank can repossess your car 45 days after you file for bankruptcy, as well. (To find out more, see Secured Claims in Chapter 7 Bankruptcy: Can I Keep My House or Car?)
When you’re behind, filing for Chapter 13 bankruptcy can be a better choice because you can catch up on your payments over a three- to five-year repayment plan. In fact, even with your arrearages, your monthly car payment will be lower because you can spread your remaining car balance over your entire repayment period.
Buying Back Your Nonexempt Property
Although many people can keep all of their property in their Chapter 7 bankruptcy, it isn’t always the case. Bankruptcy protects the fundamental things people need to maintain a household and job—not luxurious extras, such as a vacation home or an expensive cigar collection. Here are common examples of nonexempt property that you can expect to give up:
- vintage cars and motorcycles of all types (but if it’s your only vehicle, you can use your exemption on it—the point is that you shouldn’t plan to keep multiple vehicles)
- boats and recreational vehicles
- rental property and timeshares
- business merchandise and fixtures
- shares of stock and interests in LLCs, and
- artwork and other collectibles.
If your state exemption scheme doesn’t allow you to exempt an item you want to keep, all is not lost. The bankruptcy trustee will often allow you to buy back the item at a slight discount.
Questions for Your Attorney
After you've found a few local attorneys, here are some questions to ask during your consultation:
- Can I exempt all of my property if I file for Chapter 7 bankruptcy?
- Do trustees in my local area allow bankruptcy filers to buy back nonexempt property?
- Can a relative loan me money so I can buy back my property?