After a petition for bankruptcy is filed in the Bankruptcy Court, a trustee is appointed to oversee the case. In a chapter 7 liquidation, the trustee takes charge of the “bankruptcy estate.” The bankruptcy estate generally consists of all the property you own at the time you file bankruptcy, including cash, bank accounts, investments, real estate, money that is owed to you, and personal effects.
The trustee’s duty is to sell or “liquidate” the bankruptcy estate and to use the proceeds of that sale to pay your creditors. In a chapter 13 bankruptcy, you make a plan to repay some or all of your debts and the trustee generally does not liquidate your property.
Although all of your property is part of the bankruptcy estate, not all of it can be sold in a chapter 7 bankruptcy. The trustee will divide the bankruptcy estate into “exempt” and “nonexempt” property. Only your nonexempt property is sold to satisfy your debts. You are entitled to keep your exempt property.
What law defines exempt property?
Exempt property is defined both by the federal Bankruptcy Code and by state law. The exemptions in the state where you file your bankruptcy petition are available to you if you have lived in that state for two years. If you lived in that state for less than two years, the law of a state in which you lived before moving to your current residence might apply.
In many states you can only use the exemptions that are allowed by the law of that state. In other states, you can choose between the federal and state exemptions. A bankruptcy attorney can tell you what exemptions are available in your state and, if a choice is available to you, can help you decide whether the state or the federal exemptions will allow you to keep the most property.
Is my house exempt?
The exemptions available in most states, as well as the federal exemptions, allow you to keep a certain amount of equity in your house. (If your house is worth more than you owe on your mortgages, your “equity” is the difference between the value of your house and the amount of your mortgage debt.) The amount of equity you may keep varies from state to state.
If you have mortgage loans, have not missed any payments, and all the equity in your house is exempt, you can usually “reaffirm” your mortgage debt with your lender after you file bankruptcy. This allows you to keep your house provided you continue to make your mortgage payments. You might also be able to reaffirm if you can make up any missed payments.
In states with very generous exemptions, you may be able to keep your house even if you have no mortgage debt. If your equity is greater than the exemption, however, the trustee can sell your house and use the proceeds (after paying the mortgage and giving you the amount of the exemption) to satisfy your creditors. As an alternative, in a chapter 13 plan you will be required to pay at least the equivalent of the non-exempt equity you have in your home.
Is my car exempt?
The same principle applies to cars and other property used to secure a loan that you took out to purchase that property. The trustee compares the equity in your property to the exemption.
If your equity in the property is less than or equal to the applicable exemption, you can keep the property provided that you reaffirm the debt and are not behind in your payments. You may also be able to keep your car by paying its current value to your lender if the car is worth less than the balance of your car loan. If you own a car free and clear, you can keep it if its value is less than or equal to the applicable exemption.
What other property is exempt?
The exemptions in most states, like the federal exemptions, allow you to keep your household goods, clothing, and personal effects, unless they are unusually valuable. A certain amount of cash is generally exempt, as is other property.
If you are married, you may be able to combine your exemptions with your spouse’s. In many instances, debtors keep everything they own after filing bankruptcy. A bankruptcy attorney can review your assets with you to advise you how to maximize the amount of property you can keep.
Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.