One of the major concerns most people have when declaring bankruptcy is what will happen to their property. Bankruptcy can provide a way out of serious financial trouble, but there are times when some of your assets and possessions may need to be turned over during the bankruptcy process. It is very important to understand the rules for each of the chapters of bankruptcy so you can make an informed choice before filing.

Bankruptcy and Your Home

For most people, the primary concern they have during bankruptcy is whether they will be able to keep their family home when they file. The answer is that it depends: You generally must be current or be able to come current on your mortgage payments to keep your home during bankruptcy.

Courts can't and won't just eliminate mortgage debt. There are, however, some limited options available during a chapter 13 bankruptcy in the form of "lien stripping" or "cram-downs." These methods usually involve reducing the principle balance owed on a second mortgage so that it is equal to the actual market value of a home (i.e. if your home is worth $100,000 and you owe $90,000 on a first mortgage and $50,000 on a second mortgage, the second mortgage might be reduced to only $10,000 so that you no longer owe more than the home is worth). Usually, the balance remaining will be considered part of your unsecured debt and repaid as part of your repayment plan.

Cram downs can be very complicated and there are specific guidelines and rules that must be followed. They are not always available on residential mortgages as part of a standard bankruptcy. Because of the legal complications associated with pursuing this option, if you hope to try to lower your mortgage debt using a cram down, you will need to have legal help.

Either way, whether you reduce your total balance owed or not, the bottom line is that bankruptcy is not going to let you just keep the house without coming current on mortgage payments. It will, however, stop foreclosure temporarily by imposing an automatic stay. This, and the reduction in your other bills, may give you the time you need to get current and save your house.

Differences between Chapter 7 and Chapter 13

Chapter 7 requires some assets be turned over for sale to satisfy debts, while chapter 13 does not. This means that, in theory, if you owned your home it could be sold or the equity tapped into in order to pay your debts. However, in reality, this rarely happens. Chapter 7 provides for exemptions to allow you to keep certain property. A homestead exemption is available on both the federal level and the state level and shields a specific portion of equity.

On the federal level, for example, the homestead exemption allows you to keep $21,625 in home equity. Many states allow for much larger amounts of home equity to be protected, so this amount varies depending on where you live. Those over 65 are also generally permitted a larger homestead exemption. Because of this exemption, you usually are not going to lose your home or your equity in it during a chapter 7. 

Other Personal Property

Whether or not you get to keep other personal property during bankruptcy is also going to depend on your situation. If you file a chapter 13, again there is no requirement that assets be turned over. If you file chapter 7, those that aren't exempt will need to be sold. Exemptions exist for:

• Cars valued up to a certain dollar amount
• Retirement Accounts
• Tools of the trade
• Assets chosen for your "wild card" exemption (i.e. you get a set dollar amount of things you may keep and you can use that to keep anything you'd like, from your child's bike to your wife's engagement ring). 

The exemptions are again set on both the federal and state level, so you will need to check your local laws to determine the rules. 

Getting Legal Help

Because there are so many variables that go into determining what property you may keep and what must be relinquished, it is imperative you get legal help when considering bankruptcy. Your attorney can explain to you exactly what is likely to happen to your assets so you can make an informed choice.