Will I Lose All My Property If I File for Bankruptcy?

Don't worry—you won't lose everything in bankruptcy. Most people can keep household furnishings, a retirement account, and some equity in a house and car in bankruptcy. But you might lose unnecessary luxury items, like your fishing boat or a flashy car, or have to pay to keep them. To prevent expensive surprises, you'll want to learn:

• how exemption laws protect property
• what happens to items you can't protect, and
• where to find your state's exemption laws.

Once you've mastered this area, it's a good idea to review some other things you should know about filing for bankruptcy. Or check out our quick ten-question bankruptcy quiz. It can help you spot potential bankruptcy issues fast.

You Won't Lose Your House, Car, and Other Property If You File for Bankruptcy

Everyone needs things to maintain a job and home, and bankruptcy's fresh start wouldn't mean much if it stripped you of all your belongings. However, that doesn't mean that you automatically keep everything you own.

Instead, bankruptcy exemption laws protect property people need, like a working car, furnishings, and clothing. If a bankruptcy exemption doesn't protect your property, it's "nonexempt." What happens to nonexempt property will depend on whether you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy.

Example 1. Caity owes $250,000 on her house, which is worth $300,000. Her state's bankruptcy exemptions include a homestead exemption that lets her protect $50,000 in equity on the house she lives in—her house of residence.

• Because Caity has $50,000 in equity, not more, she will be able to keep her house in Chapter 7 bankruptcy if she is current on her house payment when she files and can continue paying her house payment in the future.
• Caity can keep her house in Chapter 13 bankruptcy even if she's behind on her house payment, as long as she has enough income to pay her monthly house payment and the payment arrearages in a three- to five-year Chapter 13 repayment plan.

Example 2. Ben owes $400,000 on his house worth $600,000. His state's homestead exemption lets him protect $150,000 in equity in the home where he resides.

• Because his house has $50,000 in nonexempt equity, he will lose his house in Chapter 7 bankruptcy. The Chapter 7 trustee assigned to his matter will sell the house, give Ben the $150,000 homestead amount, deduct sales costs and the trustee's fee, and distribute the remaining amount to creditors.
• Ben can keep his house in Chapter 13 bankruptcy, but only if he has enough income to make the monthly house payment and pay creditors for the $50,000 in nonexempt equity through the Chapter 13 repayment plan.

Learn more about protecting your house in Can I Keep My House If I File for Chapter 7 Bankruptcy? Or, if you're behind on your house payment or have nonexempt equity, read about keeping your house in Chapter 13 bankruptcy.

If you want to know the specific items your state will allow you to protect, keep reading—we take you through the process step-by-step.

You Can Keep Property Protected by a Bankruptcy Exemption

You'll look to your state exemption laws. Each state has a set, and federal bankruptcy exemptions exist, too. Most states require filers to use the state exemption laws. However, some states let filers use the federal exemptions if they'd protect more property.

Make sure you have the correct list. If your property is on it, you keep it.

You'll Lose Property That Isn't Covered by a Bankruptcy Exemption

At least in Chapter 7 bankruptcy. It works a bit differently in Chapter 13.

Losing Nonexempt Property in Chapter 7 Bankruptcy

The Chapter 7 bankruptcy trustee overseeing your case can't sell your exempt property in Chapter 7. But the trustee can sell nonexempt property. Even so, the trustee won't bother selling an asset that isn't worth much. The trustee will first decide if the property will bring a reasonable amount for creditors.

For instance, assume you owe $4,500 on a second car worth $5,000. You already used your state's motor vehicle exemption to protect the equity in your first car, so your $500 in equity on the second car is nonexempt.

Nothing would remain for creditors after paying storage fees, sales costs, and the amount owed to the lender because trustees must pay off car loan liens in Chapter 7 when selling property. The trustee would likely abandon the car, and you'd get to keep it.

Sometimes a filer wants to keep property that a trustee could otherwise sell for a reasonable amount. In that case, many trustees will sell it to the filer at a discounted price—usually about twenty percent less. The deal will depend on the amount the trustee would save on sales costs.

Learn how to file for bankruptcy and keep a car in Chapter 7 bankruptcy, or keep a car in Chapter 13 bankruptcy.

Paying for Nonexempt Property in Chapter 13 Bankruptcy

A Chapter 13 bankruptcy trustee won't sell your property, even if you'd like the trustee to do so. You'll keep all of it. As good as this might sound, it can get expensive. You must pay the value of your nonexempt property through your repayment plan.

If you can't afford the payment—and many people can't because nonexempt equity can drive up a monthly payment fast—you won't qualify for Chapter 13 bankruptcy. Keep good records if you try to get around this problem by selling assets before filing for bankruptcy. You can always sell property and use the funds for your expenses, but you should plan to turn over any remaining amount to the trustee.

Where to Find Your State's Bankruptcy Exemptions

Your state's bankruptcy exemptions are in your state code. If you're not sure where to find your state's statutes, we can help. We provide state exemption lists and even links to online statutes in Bankruptcy Exemptions—What Do I Keep When I File for Bankruptcy? Scroll down to the middle of the article for the link to your particular state.

But remember, mistakes can be costly. You must read the code section itself to be sure it applies or speak with a knowledgeable bankruptcy lawyer.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.