The purpose of bankruptcy is to give someone overloaded with debt a fresh financial start, not to create a worse position. And if you had to repurchase all of your belongings, you’d undoubtedly 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.
Once you file, everything you own becomes part of what’s known as the bankruptcy estate. 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.
Every state has its own set of exemptions, but some allow you to choose between the state list and the federal bankruptcy exemptions (but you can’t cherry pick items between the two).
If you have property that you can’t keep, the bankruptcy trustee—the court-appointed official responsible for overseeing the estate—sells it in a Chapter 7 case and distributes the funds to your creditors. It works a bit differently in a Chapter 13 matter. You'll pay for nonexempt property, instead (more below).
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:
This list is not exhaustive. Your state will likely provide additional property protection.
The point of keeping property in bankruptcy is to ensure that you have what you need—not to protect luxury items. You should expect to surrender the following:
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).
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. Understanding these differences will help you determine the appropriate chapter for you.
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.
The trustee doesn’t treat all unsecured debts the same but instead 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).
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:
Keep in mind that your case is unique. A bankruptcy attorney can review your situation and explain what will happen to your property, as well as the cost to file for Chapter 7.
You’ll find additional information about exempting property in the Chapter 7 exemption overview article, as well as answers to specific exemption questions in the Chapter 7 bankruptcy exemption FAQ.
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 or your disposable income—whichever is greater (secured creditors in Chapter 13 get paid differently).
Here’s how you’ll do it.
In Chapter 13 bankruptcy, you’ll start by exempting all of the property you’re entitled to protect, 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 possibly more). If you can’t afford a large monthly repayment plan payment, you can sell some of your nonexempt property yourself and let the trustee use the funds to pay off creditors (it’s important to know which creditors to pay down).
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. A bankruptcy lawyer can explain your monthly plan payment and how much your Chapter 13 will cost.
If you file for bankruptcy with your spouse, you might be able to double the exemption amounts. You can double the federal exemptions. Many states all you to double, too, but not all. And, even states that allow doubling might not let you double all exemptions. For instance, many don't allow you to increase the homestead exemption when protecting equity in your residence.
Exemptions aren’t automatic. If you don’t take steps to claim exempt property, you stand to lose it. You’ll find the exemption law by clicking on the following links:
You’ll list your exempt assets on Schedule C: The Property You Claim as Exempt. You’ll also be prompted to list the statute (law) enabling you to retain the asset in bankruptcy.
