Will I Lose All My Property If I File for Bankruptcy?
An overview of how property is treated in Chapter 7 and Chapter 13 bankruptcy.
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. In Chapter 7, you may lose property that isn't protected by an exemption. But most Chapter 7 filers are pleasantly surprised to learn that they will be able to keep all of their property, either because it's exempt or because it isn't worth enough to cover the cost of taking it and selling it.
Chapter 13 Bankruptcy
If you file for bankruptcy under Chapter 13, you will get to keep all of your property, whether it's exempt or not. In Chapter 13, you must propose a repayment plan to pay off some or all of your debt. You must make monthly payments under the plan for three to five years (the length of the plan depends on your income, expenses, and debts). Once you've made all your payments, all dischargeable debts are wiped out.
Chapter 7 Bankruptcy
If you file for Chapter 7 bankruptcy, you don't have to repay any debt. Instead, you must give up any property you own that isn't exempt under your state's law (or the federal bankruptcy exemptions, if your state allows you to use them instead). The bankruptcy trustee can take this nonexempt property, sell it, and distribute the proceeds to your creditors. Once your property has been dealt with and you've met all other requirements (including attending your meeting of creditors and telling the court how you plan to handle any secured debts), you'll receive your bankruptcy discharge, typically four to six months after you file your case.
Many Chapter 7 filers don't own any nonexempt property. State exemption laws typically protect some equity in your home, a car, your clothing, home furnishings, retirement accounts, and tools of your trade. (To learn more about exemptions and find links to every state's exemptions, see Bankruptcy Exemptions - What Do I Keep When I File for Bankruptcy?) Some states also have a wildcard exemption: a dollar amount you can use to protect any property. Depending on what you own and how generous the exemptions available to you are, you may well find that all of your property is exempt.
If You Have Nonexempt Property
Even if you have property that isn't protected by an exemption, you may be able to keep it. First of all, you will get to keep it if it isn't the time and money the trustee would spend taking it and selling it. For example, if you own a second car that's worth $5,000, and you still owe $4,500 on it, the trustee might decide not to take it. Once the trustee pays the costs of repossessing, storing, and selling the car, what's left will probably be only enough to cover your car note. Your other creditors won't get anything out of the deal. Similarly, if you own property that just isn't worth much (like a used sofa, an old rowboat, or a small collection of LPs), the trustee probably won't bother to take it.
If your nonexempt property is worth more, you may be able to negotiate with the trustee to keep it, but you'll have to give something up in exchange. If you have exempt property you don't need, you might be able to trade that so you can keep your nonexempt property. For example, if you really want to keep your nonexempt darkroom equipment (worth about $1,000), you might offer to give the trustee an antique armoire worth about the same amount, even though you'd otherwise get to keep it as exempt furniture.
You can also offer to "buy back" your nonexempt property, if you can come up with enough cash to pay about what your creditors would have received if your property were taken and sold. You could borrow the money, use your income to pay, or sell exempt property.