Potential clients come to me with a wide variety of notions about how their assets are affected by the filing of Chapter 7 or Chapter 13 bankruptcy. Some people are under the impression that they are “allowed” only a certain dollar-value amount of property in a bankruptcy and that the excess value will be lost; some are under the impression that they are allowed a static set of different things: 1 car, X amount of furniture, and so on.
In a shorthand sort of way, these assumptions are sort of true … but not entirely.
What you are allowed to retain in terms of personal assets through the bankruptcy process depends, first of all, greatly upon whether you are filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. In either case, the same process of listing, describing, categorizing, and valuing your assets must occur. However, only in a Chapter 7 bankruptcy is there any real prospect of your personal property actually being taken from you and liquidated, or sold off, for the benefit of your creditors whose debts are large to be entirely discharged by the bankruptcy process itself. There is no liquidation of property or assets at all in a Chapter 13 reorganization bankruptcy, which is one of that Chapter’s greatest advantages.
Chapter 7 and Liquidation
In a Chapter 7 bankruptcy, the liquidation (seizure and sale) of some of the personal assets of the filing consumer is how their creditors are partially compensated by the court (and, therefore, by the US government), which is otherwise letting the consumer off the hook for all of his or her debt (other than debt that is not dischargeable, such as recent tax debt, student loan debt, and a few other forms of debt).
However, that said, most consumers who file Chapter 7 bankruptcy do not lose any personal property at all.
This is because the bankruptcy process does indeed allow you to retain X amount of your stuff. It is not, as some of my clients in Michigan have thought, an overall dollar amount. What you are allowed to retain depends on the type of property involved, and it depends upon how your attorney is protecting it.
Protection of Property
By “protection” of property, what is actually meant is the exemption of the property from the legal bankruptcy estate containing everything you own, are owed, or owe anyone else that is created by automatic legal function as soon as you file a bankruptcy petition with the court. By default, everything you own (which should all be listed in the petition) is part of the bankruptcy estate–and subject to the power of the Chapter 7 Trustee assigned to your case after filing by the court to seize and liquidate it in order to distribute the resulting proceeds to your creditors. However, the Bankruptcy Code provides what are called “exemptions.” These “exemptions” are bits of the Federal Bankruptcy Code statute that allow you to “exempt” or remove from your bankruptcy estate certain types of property up to certain dollar value amounts. Most states have their own sets of exemptions as well, and, in some states, such as Michigan, where I practice, your attorney has the option of using either the state set of exemptions or the Federal exemptions.
One example of a Federal exemption is the jewelry exemption: up to $1450.00 (currently) worth of jewelry may be exempted from the bankruptcy estate. Property is generally valued, depending on your geographic area and the court rulings of your individual Federal court district, at liquidation or “garage sale” value—not replacement or insurance appraisal value. If your jewelry could be sold out of your front yard for no more than $1300.00, the Federal exemption would exempt—and protect—all of it. If it were worth $1500.00, on the other hand, and there were no other exemption available to cover the additional $50.00, you would have to work out a settlement with the Chapter 7 Trustee through your attorney to pay the Trustee the additional $50.00 if you wanted to keep it–or you would deliver it to the Trustee for auction and sale.
Not every Chapter 7 case can be a “no-asset” case in which no property is subject to liquidation by the Trustee. Sometimes, that is just a cost of the benefit of walking away from a large amount of debt otherwise scot-free. However, it is the minority of cases in which this occurs, and, nearly always, at least in the Eastern District of Michigan, where I practice, the Trustee would always rather take a check for $50.00 than to have to sell your jewelry off. Deals can be made to retain even property that cannot be fully exempted.
Before deciding that bankruptcy is too great a danger to your assets to consider as an option for moving forward from unmanageable debt, speak with an experienced bankruptcy attorney who can expertly guide you through the options available: full exemption and protection, Chapter 7 and property surrender, Chapter 7 and Trustee settlement negotiation, or Chapter 13 bankruptcy. Not every option is a perfect option, but one of them may be significantly better than treading water against a years-long struggle against overwhelming personal debt. Learn more about my experience with bankruptcy.