If You Declare Personal Bankruptcy, What Can You Keep?

By Cara O'Neill, Attorney
When you file for bankruptcy, you can protect property using your state's exemption law.

The purpose of bankruptcy is to give someone overloaded with debt a fresh financial start, not to put you in a worse position—and if you had to repurchase all of your belongings, you’d certainly be in a tight spot. Fortunately, filing for bankruptcy doesn’t mean giving up everything you own. You’re allowed to exempt (keep) a reasonable amount of property that you’ll need to work and live, such as household items, clothing, and your retirement account. You might be able to protect other things, too, such as a portion (or all) of the equity in your home. To find out exactly what you’ll be able to protect, you’ll need to review your state’s exemption statute.

(Find out more about how bankruptcy works by reading What Filing for Bankruptcy Can (and Cannot) Do for You.)

How Is Property Protected in Bankruptcy?

Once you file, everything that you own becomes part of what’s known as the bankruptcy estate. The bankruptcy trustee—the court-appointed official tasked with monitoring your case—is responsible for overseeing the estate and distributing funds (if any) to your creditors.

Each state decides the type and amount of property that its residents can take out of—or exempt from—the bankruptcy estate. You’ll find the property you’re allowed to exempt in your state’s exemption law. In most states, the state itself creates it’s own exemption list. Others opt to use the federal bankruptcy exemptions, instead. A few states permit you to choose between the federal and state exemptions, depending on which list is more advantageous for you (but you can’t cherry pick items between the two).

Property That Most States Allow You to Exempt

Many people can keep all of the property that they own when they file for bankruptcy. You’ll likely be able to retain the following types of assets:

  • furniture, kitchenware, and bedding
  • clothing
  • a small amount of jewelry
  • tools of the trade (property you need for your work)
  • ERISA-qualified retirement accounts
  • a modest car, and
  • some equity in your home.

This list is not exhaustive. Your state will likely provide additional property protection.

Nonexempt Assets (Property You Probably Won’t Be Able to Protect)

Most people must let go of luxury items. You should expect to have to surrender the following:

  • exotic or expensive automobiles
  • boats and other watercraft
  • recreational vehicles and airplanes
  • timeshares and vacation homes
  • rental property
  • valuable furniture and artwork, and
  • investment and savings accounts.

If your state has a “wildcard” exemption—an exemption that allows you to keep any property of your choosing up to a certain dollar amount—you’ll be able to use it on a luxury item. For instance, most states don’t allow filers to keep valuable collectible items, such as a vintage doll or coin collection. With a $10,000 wildcard exemption, you could keep your baseball card collection, an expensive set of skis, or anything else you like (up to $10,000 in value, of course).

How Exemptions Work in Chapter 7 and Chapter 13 Cases

The type of bankruptcy chapter you file doesn’t change the amount of property that you can exempt; it remains the same in both a Chapter 7 and Chapter 13 bankruptcy. What’s different, however, is the treatment of your nonexempt property. You’ll want to understand these differences because it will help you determine the appropriate chapter for you.

Protecting Property in Chapter 7 Bankruptcy

The trustee will liquidate (sell) any nonexempt property and distribute the proceeds to your unsecured creditors. An unsecured creditor (a credit card company, for example) is different from a secured creditor (a mortgage or auto lender) because it doesn’t have the right to take back your property—your car or home –if you don’t pay your debt. (You can learn more about secured debts by reading Secured Claims and Liens in Bankruptcy.)

The trustee does not treat all unsecured debts the same, but rather disperses funds according to the priority of the particular creditor. For instance, a past due support obligation is higher in priority than an overdue tax debt, which in turn has more priority than a credit card debt (it falls last on the list). (Read more about how the trustee pays your debts in Understanding the Payment Priority of Debt in Bankruptcy. [LINK]

So, if the trustee gets $20,000 from the sale of your sailboat, and you owe $10,000 in child support, $15,000 in taxes, and $50,000 in credit card debt, the trustee will make the following distributions:

  • $10,000 towards child support arrearages
  • $10,000 for unpaid tax (leaving a $5,000 balance), and
  • $0 for credit card debt.

(To learn more about the things you can retain, read Chapter 7 Bankruptcy Exemptions: What Property Can I Keep?)

You Get to Keep All of Your Property in Chapter 13 Bankruptcy

The trustee doesn’t sell your nonexempt property in a Chapter 13 case. You can keep all of it. But there’s a catch: You have to pay your unsecured creditors the value of your nonexempt property. Here’s how you’ll do it.

In Chapter 13 bankruptcy, you’ll start by exempting all of the property you’re entitled to, just as you would in a Chapter 7 bankruptcy case. Then you’ll tally up the value of your nonexempt property. You’ll need to pay at least that amount to your unsecured creditors over your three- to five-year repayment plan (but likely more). So you see, there’s no getting around it. You must pay for the right to keep nonexempt property. If you can’t afford a large monthly repayment plan payment, you can sell some of your nonexempt property yourself and use the funds to pay off creditors—but it’s important to know which creditors to pay down before doing so.

There’s more to creating a Chapter 13 plan, too, and most people are unable to do it without professional help. It’s strongly suggested that you consult with a bankruptcy attorney before moving forward with your case.

How to Claim Property As Exempt

Exemptions aren’t automatic. If you don’t take the steps to claim your property as exempt, you stand to lose it. You’ll start by listing the assets you’re allowed to exempt on Schedule C: The Property You Claim as Exempt. You’ll be prompted to list the statute (law) allowing you to retain the asset in bankruptcy, as well.

(You can find your state’s exemption list in this article: How to Find Your State Bankruptcy Exemptions.)

Questions for Your Attorney

  • What can I keep under my state’s exemption scheme?
  • Can I keep twice as much property if my spouse files for Chapter 7 bankruptcy with me?
  • Will keeping all of my property in Chapter 13 bankruptcy be feasible?
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