Property Exemptions: What Can I Keep When I Declare Bankruptcy?

Filing for bankruptcy is a complicated and stressful task. But some situations leave you with no other option. For example, when you’re drowning in debt and your salary is the only thing keeping you afloat, it may be a wise move to declare personal bankruptcy to prevent wage garnishment action.

Bankruptcy entails plenty of concerns, mostly uncertainties. And you may wonder if you can keep your properties even if you’re officially bankrupt. The answer depends on the type of bankruptcy you’ve filed.

Chapter 7 Bankruptcy

Chapter 7 is a liquidation bankruptcy. This means that the trustee will sell your properties and possessions to pay off your debts. This applies to you if you have a limited income and don’t have the financial capacity to pay what you owe. To qualify for Chapter 7, you have to take the means test.

The means test is a requirement if most of your debt comes from consumer expenses (e.g., credit card debts) rather than tax, business, and tort debts (i.e., damages you owe or injuries you’ve caused). The test will compare your monthly income against the state’s median income that corresponds to your family’s size. If your income is higher, you may not be eligible for Chapter 7 because this implies that you can pay your bills and still have enough money to pay your debts.

Property Exemptions

men signing a documentA common belief is that when you file for bankruptcy, you lose everything. But this is not necessarily true. Although you need to liquidate your assets in Chapter 7 bankruptcy, some exemptions can allow you to keep your properties.

Bankruptcy exemptions typically include necessary properties, like your house and your car, but only to a certain amount. If the property is exempt, you can keep it during and after your bankruptcy. If not, the bankruptcy trustee will sell it to help pay your debts.

For example, the state has a vehicle exemption of $5,000. If your car is worth $3,000, you can keep it. But if it’s worth more, the trustee may sell your car, pay you the $5,000 exemption value, and pay the remaining amount to your creditors.

Each state has a list of property exemptions, which is separate from the federal bankruptcy exemptions. Some states allow debtors to choose whether they will fall under state or federal exemptions. To determine which set will work best in your favor, list both state and federal exemptions values and check which properties you can keep under each system.

Chapter 13 Bankruptcy

With Chapter 13 bankruptcy, you don’t have to sell your properties to pay what you owe. The court will mandate a repayment plan according to your monthly income. This plan is payable from three to five years. If you are able to follow the repayment plan and simultaneously pay for your secured loans (e.g., home loan, car loan), you can keep the assets after you’ve paid off all of your debts.

The question of whether or not you can keep your properties when you’ve filed for bankruptcy depends on your financial capability to make regular payments to your creditor. If you can pay your bills, loans, and debts regularly, then you don’t need to sell your possessions. If not, liquidating your assets may be your best chance at recovering from your financial impediment.

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