What happens to your property in bankruptcy depends on whether you file under Chapter 7 or Chapter 13. In Chapter 13, you get to keep all of your property, but you must pay your creditors all or some of what you owe them in a repayment plan that lasts three to five years.
In Chapter 7, however, you might lose some of your property. You don't have to directly repay any debt in Chapter 7. Instead, the trustee is entitled to take and sell any property you own that isn't covered by an exemption (a protection offered by state or federal law that prohibits creditors or the trustee from taking certain essential items of property). The proceeds from selling your nonexempt property is then distributed to your creditors (and used to pay the trustee's fee). If you own property that has not only sentimental value but value in the marketplace as well, you might lose it if it isn't exempt. To learn more, see Chapter 7 and Chapter 13 bankruptcy.
How Exemptions Work
Exemptions are intended to protect necessities. Each state's list of exemptions is different, but most cover at least some equity in your home, a vehicle, clothing, home furnishings, and retirement accounts. (To learn more about exemptions -- and find links to every state's exemption list -- see Bankruptcy Exemptions - What Do I Keep When I File for Bankruptcy?) Some states are more generous than others. For example, some states allow you to exempt all of your home equity, even if you own your home free and clear; others limit you to $5,000 or $10,000. If you have a considerable amount of equity that isn't protected by an exemption, the trustee could take and sell your home.
The same is true of heirloom items, such as artwork, furniture, books, and jewelry that are handed down from generation to generation. Depending on the value of the item and your state's exemption list, you may be able to protect certain things. For example, most states allow you to keep a family Bible. Many states exempt furnishings, clothing, and at least a certain amount of jewelry. However, if you have valuable heirlooms that aren't protected by an exemption, you may well lose them in Chapter 7 bankruptcy. To learn more, see bankruptcy exemptions.
Others Ways to Keep Heirlooms
If none of the exemptions available to you protect your family heirlooms, all hope isn't necessarily lost. Here are a few other ways you may be able to keep your treasured property:
- Use a wildcard exemption. Some states offer a wildcard exemption, which you can apply to any property you can like to exempt. Some wildcards are relatively small (in the hundreds of dollars), which may not fully protect the item. But some states allow you to use your homestead exemption (which usually protects home equity), or any portion of it you don't use for your home, as a wildcard. If your state offers a wildcard, you may be able to cobble together protection for a particular item. For example, let's say you have an antique love seat that belonged to your great-grandparents. It's worth $4,000. Your state exempts only $2,000 of furniture, so you still have $2,000 to protect. Your state offers a $500 wildcard exemption. It also allows filers to use their homestead exemption as a wildcard. Your state protects $15,000 of home equity, but you only have $12,000 of equity in your home. Using the $2,000 furniture exemption, the $500 wildcard exemption, and $1,500 of your remaining homestead exemption, you can protect the love seat -- and still have $1,500 of your homestead exemption to apply to other property.
- Offer exempt property instead. The trustee is not interested in depriving you of your most treasured possessions; he or she only wants to make sure that your creditors are repaid to the extent possible. If you have a family heirloom that you can't protect with an exemption, you might be able to offer the trustee exempt property of equal value in its place. For example, if you couldn't find any exemptions that fit your antique love seat, but you are willing to give up your exempt car, the trustee might agree to the deal and call it even. Here are the standard property exemptions in bankruptcy.
- Offer cash. You might also try "buying" your property back from the trustee. If you can come up with the cash, through some combination of selling your exempt property, borrowing, using income, and so on, you could offer to pay the trustee what the property is worth, less what it would cost the trustee to take it and sell it. If you don't have the money, perhaps a family member who is equally invested in keeping the item could lend it to you -- or pay the trustee and take the property.