Many people have the impression that bankruptcy means giving up everything you own. Quite the opposite is true; bankruptcy is designed to offer you relief from debt without the need to give up basic things that bring stability to your life. That said, a great deal of what you can keep depends on the specifics of your financial situation and there are rules for each category of possessions you have.
These rules vary from state to state, so finding out exactly what you can keep in bankruptcy will take some additional research on your part. Check out general guidelines from the federal law based on the two most common types of bankruptcy: Chapter 7 and Chapter 13.
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What You Can Keep Under Chapter 7
When filing for Chapter 7 bankruptcy relief, the assumption is that there is no possible way for you to repay your debts, even with a structured repayment plan. Otherwise, you’d be filing under Chapter 13, or maybe not filing at all.
For this reason, and because a certain number of your debts will be discharged, there is a limit to what you can keep. Normally, you can keep your home, cars, and most of your needed possessions and family heirlooms.
However, for each category of possessions, there is an upper monetary limit to the value of what you are allowed to hold onto. These limits are called “exemptions.” If you’re married, you typically get to double the amount of your exemptions. The specifics depend on your state law. In most places, you automatically use the state exemptions, but 17 states allow you to choose between local law and federal law.
How do exemptions work?
If any of your possessions’ value exceeds the exemption amount, then it will most likely be repossessed and sold. So, for example, if your state’s vehicle exemption is $5,000 and your vehicle is worth $7,000 then you’ll most likely have the car repossessed.
The numbers aren’t always steadfast, however. Retrieving and selling items takes a certain amount of time, effort, and money from the creditor. If your item’s value is just above the exemption limit, it might not make financial sense for the creditor to take it.
Let’s look at the $5,000 vehicle exemption example again. If your vehicle is actually only worth $5,200 the creditor only stands to profit $200. But when you take into account the cost of towing and storing a car, it would probably exceed that $200 gain. So in that instance, the creditor might not actually do anything.
State exemptions are also impacted by your residency history. Typically, you must have resided in the state for at least two years to use their exemption rules during bankruptcy. If you’ve lived there for less than two years, you’ll need to figure out which category you fall under. For a permanent resident under two years but over 91 days, you’ll use the state where you lived the majority of the time.
If you’ve been in your current state for less than 91 days, you can either file bankruptcy in your previous state or wait until you’ve had longer residency where you are now. If you’re confused or not sure which situation applies to you, talk to a bankruptcy lawyer.
Can you keep your home under Chapter 7?
For your home, as long as you’ve been making your payments and don’t have too much equity, you can request a “reaffirmation agreement” with your lender and keep the property. If you haven’t been making your payments, often you can still keep your home as long as you don’t have too much equity.
The problem with having a lot of equity when filing Chapter 7 is that your creditors are allowed to liquidate assets to pay back your debts. A limit is placed on how much value (money) you can keep. Having a lot of equity in your home is like cash; if you really want to hang onto your house in such cases, Chapter 13 might be a better solution.
In addition to exemptions for your house, there are exemptions for vehicles and just about everything else you might own. You’ll be able to keep things up to the limit of each exemption.
For example, if the exemption for household goods is $5,000 in your state and you own $10,000 in household goods, you’re going to have to give up some household goods. It’s not just a punishment; those items will be auctioned to help pay off your creditors.
What You Can Keep Under Chapter 13
Under Chapter 13, you agree to pay back a portion of your debts through a multi-year payment plan. There are no income requirements, so if you don’t qualify for Chapter 7, this is probably the right plan for you.
In many cases, you can keep everything you own without too much concern for exemptions. However, you still have to pay your creditors an amount that’s fair, which means the amount must be at least as much as what the creditors would have received under a Chapter 7 case.
It’s possible you will have to liquidate certain possessions or assets, but not necessarily. This can become a tricky issue with great variations from state to state, so it’s best to talk to your local bankruptcy court or an attorney.
When it comes to your home, Chapter 13 is a good way to stall foreclosure if you’re behind on payments. You’ll have to keep up with your regular monthly payments, but you can sometimes fold any backed up payments into your repayment plan.
Bankruptcy: What You Keep Vs. What You Give Away
When thinking about what you can keep during bankruptcy, a lot depends on how you look at it. While you will get to keep most basic material things in many cases, bankruptcy is a very humbling experience, and usually getting through it is a lot of hard work. Certainly, you won’t get to keep everything, but in addition to what you have to give away, you’ll be giving away a lot of stress while getting to keep your sanity.
Bankruptcy does come with some personal and financial repercussions. For instance, you’ll be giving up certain freedoms and spending patterns, such as lines of credit and your ability to take out loans. You’ll also be giving up the ability to leverage many of your assets, particularly during the bankruptcy process.
Additionally, with bankruptcy, you’ll be giving up the flexibility to make financial mistakes, and in return, you’ll have to keep a lot personal discipline. In some cases, you may be giving up long-held attitudes concerning your relationship with money, as well as entire lifestyle choices, both of which involve sacrifices of a non-material nature.
If your debt stemmed from a one-time catastrophe, like a major health battle or bout of unemployment, bankruptcy could help you get back on your feet. No matter what happened in the past, you can get a fresh start with bankruptcy.