Can I Keep My Car? House? Personal Property?
It's a common belief that if you file for bankruptcy you will have to give up a lot of your property, but this couldn't be further from the truth. Bankruptcy is not meant to strip you of your assets or punish you for getting into debt.
Bankruptcy is meant to help debtors get out of a financial situation that they otherwise would be stuck in. The fact is, in the great majority of "liquidation" bankruptcy cases, no property will be affected.
The simple reason is that most of the time there is no non-exempt property worth the trouble to liquidate.
"Liquidation" Bankruptcy, Your Property and the Bankruptcy Trustee
In a chapter 7 bankruptcy case (the most common type), all of your financial assets, property and debt will become part of the "bankruptcy estate" and will be under the control (temporarily) of the bankruptcy trustee assigned to your case.
In essence, the bankruptcy trustee retains power of attorney rights over your finances, within certain guidelines.
The Bankruptcy Trustee
The role of the trustee in a chapter 7 bankruptcy case is to ensure all of your paperwork is accurate and honest, and to ensure creditors are equally disbursed any funds that can legally be taken out of the bankruptcy estate.
To that end, his or her job is to consider all of your assets and debts, determine if there is any significant non-exempt equity in the bankruptcy estate, and liquidate that asset (or assets) to raise money to repay some of your debt. As a matter of fact, the trustee has an incentive to do so by earning a percentage of the money disbursed out to creditors. However, this job is much more difficult than it sounds because the bankruptcy court offers so much protection to debtors and tends to favor honest debtors over creditors' claims.
Exemptions and Trustee Abandonment
In a typical chapter 7 bankruptcy case, the trustee will abandon all property (abandonment means you keep the property) except that which is very valuable and relatively easy to sell. It's simply too difficult and time consuming to raise money trying to sell of most personal property and household goods.
This means the trustee is left trying to sell off cars and real estate. The problem is that bankruptcy exemption laws always cover equity in cars and a home to a certain limit, which usually is enough to cover the equity the petitioner has in the property. For example, imagine you live in California and your own a house. The house is worth $500,000, and the loan on the home is for $450,000 so you have $50,000 in equity that the trustee could get if the house were sold. The problem is the homestead exemption in California is $75,000 for a single family, so that $50,000 is more than covered and the trustee can't do anything with the house.
The same goes for an automobile with a loan on it. It's usually not worth enough to cover the loan against it and get more than the exemption amount out of it.
Non-Exempt Equity
There are cases where there may be significant equity in the bankruptcy estate that is not covered under an exemption, such as equity in a piece of investment, rental property or vacation property, or a second or third car that doesn't have a loan against it. In those cases a chapter 13 bankruptcy may be best, but if chapter 7 is more desirable, then the debtor has to make some choices.
Giving Up Non-Exempt Property vs. Reaffirmation or Redemption
There are a couple ways to handle non-exempt property in a chapter 7 bankruptcy. The debtor can elect to give up the property, reaffirm the property or redeem the property.
Giving Up the Property
Sometimes it may be best to simply let some property go. For example, if you own a rental property and you have $20,000 in equity in it, but you also have $50,000 in credit card debt. If you choose a chapter 7 bankruptcy, and elect to give up that property you will lose $20,000. In return, however, you get out of $50,000 in debt liability. The net result is that you make $30,000 in the deal.
Another scenario may be you own two cars. Suppose that the automobile exemption in your state is enough to keep one of them, but not the other. Depending on the equity you have in the car, its value and your monthly payment, it may be a wise decision to let it go and get another, more affordable car after your case is completed.
Reaffirming Property
If you do not want to give up the property, you may be able to work out a reaffirmation agreement with the creditor and the bankruptcy court. When you reaffirm property, you also reaffirm the debt behind it, which means you agree to keep the debt out of the bankruptcy estate in return for keeping the property. This means that the property and the debt behind it are kept out of the bankruptcy and you will be held liable to maintain payments on it. The creditor will usually agree, because they get to keep making their money, but the trustee may not because one creditor is being favored over the others.
However, if you can show that the property being taken would put an undue hardship on you and your family then the court will likely grant the reaffirmation agreement. For example, suppose you own a second car worth $30,000, the loan against it is $25,000 and you've already used up the automobile exemption on your primary car. If you can show that the second car is a necessity to keep your spouse employed, then it may be a hardship for the trustee to sell it. If the court agrees, it will allow the debt to be reaffirmed. Essentially, if the court agrees that the reaffirming of debt is in your best interest, it will allow it.
Redeeming Property
Redemption is similar to reaffirmation, but requires that you offer up a lump sum of cash equivalent to what creditors would receive if the property were liquidated. Using the same car example from above ($30,000 car, $25,000 loan, $5,000 in equity), if the trustee were to sell off the car, the lien holder would get $25,000 and the $5,000 in equity would be equally disbursed among the involved creditors. However, if you were to offer $5,000 in cash, then you could redeem the property and continue paying off the $25,000 loan. The trustee still gets the $5,000 to give to the creditors but you get to keep the car. Again, the court may not allow this to happen unless the judge believes that selling the car is in your best interests, so you will have to be able to make your case.
Special Issues with Car Repossession
If you file for bankruptcy, your car cannot be repossessed, but what if it's already been repossessed? There have been cases where a debtor's car has been repossessed before they filed for bankruptcy, and the court ordered that the car be returned because it was deemed to be a "preferential transfer." A preferential transfer is a payment to one creditor in a bankruptcy case that is deemed to be unfair because the other creditors do not get the same treatment, or rather, they don't get any of that disbursement. The whole purpose of a chapter 7 bankruptcy is to ensure you are relieved of as much debt liability as possible and that creditors are all treated equally. Preferential transfers violate that equality so the court will "undo" the transfer.
Preferential transfers can occur anywhere from 1 to 90 days before a bankruptcy case is filed, or any time during the pending case. If a creditor repossesses your car, and you file for bankruptcy one week later, the court can order that the car be returned to you (assuming it hasn't been sold). To do so, you will need to be able to prove and convince the court that the repossession poses an unfair disbursement to one creditor and should be treated as a preferential transfer. If the court agrees, they will order the car returned to the bankruptcy estate. If your equity in the car is below the exemption amount in your state, you get to keep the car. You will need to stay current on the payments, but hopefully that becomes easier once you're relieved of all your dischargeable debts.
What to Take Away From This
The misconception that should be cleared up here is that the bankruptcy court is not out to take all of your things. The court is there to look out for your best interests, help you get back in control of your financial situation and give you the fresh start promised by bankruptcy law. Speak to an attorney for more advice on a bankruptcy proceeding.
Next Steps
6. Your Options: Chapter 7 vs. Chapter 13
7. Planning Your Bankruptcy Strategy
8. Completing the Bankruptcy Forms
Thinking About Bankruptcy?
