How to Keep Your Property in Bankruptcy

It is a common misconception that when a debtor files for personal bankruptcy protection, he or she will wind up losing a lot of their property to “liquidation”. This is not entirely true, as a matter of fact, the majority of personal chapter 7 bankruptcy cases result in the loss of no property whatsoever.

Bankruptcy Exemptions

The first line of defense from liquidation of property in bankruptcy is the set of allowable exemptions, which are granted at the state level. For example, in Florida, there is an exemption that protects an unlimited amount of equity in a home, so many petitioners will put their available cash towards there home to protect it during bankruptcy.

Careful and thoughtful pre-bankruptcy exemption planning is key to ensuring assets are protected during a bankruptcy case. An experienced attorney has a lot of tool to help their clients keep their property by exemption.

Trustee Abandonment

Another key to keeping priority is realizing what property is likely to be easy to liquidate to raise cash. The vast majority of personal items are simply too difficult to sell, or of too little value, and will wind up being “abandoned” by the trustee, which means he or she will not bother trying to liquidate it, and the petitioner is free to keep all of it.

Redemption and Reaffirmation of Valuable Property

This is the last line of defense for protecting property in bankruptcy. For those items, most commonly cars, that are valuable, easy to sell, and not always covered by enough exemption, the petitioner has two options to use to keep it, depending on the financing of the property.

Example 1

Take for example, a car worth $12,000 on which the petitioner owes $12,000. In this case, the petitioner has zero equity in the car, so there is nothing for the trustee to get out of it. In this case, the petitioner will be able to keep it.

Example 2

In this case, the car is worth $12,000, but the debtor owes only $8,000 on the car. If the state allows a $2,000 automotive exemption, then there is $2,000 remaining that the trustee could get out of it, and so it may be liquidated. In this case, the debtor could reaffirm the debt, and promise to repay it, while also coming up with $2,000 in cash, to “redeem” the property.

Example 3

In this example, the $12,000 car is owed outright. In order to keep the property, the debtor might have to offer $10,000 in other assets or cash, in order to keep the car.

Now, $2,000 is a rather small automotive exemption, and most state offer much more.

Talk to an Attorney First

Bankruptcy is a complicated process and complex set of laws, so it is absolutely critical that anyone considering filing for bankruptcy protection to erase debt and get a fresh start talk to an experienced bankruptcy attorney before making any decisions.