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

You won’t lose everything when you file for bankruptcy. Bankruptcy exemption laws let you protect (keep) essential property—like some equity in a house and car, a retirement account, and household furnishings—no matter which chapter you file. Property an exemption doesn’t cover is “nonexempt,” and a Chapter 7 trustee will sell it, or if you file for Chapter 13, you'll pay for it through a Chapter 13 repayment plan. Learn how exemption laws decide which property you keep, whether you’ll keep your specific house or car, what happens to items an exemption doesn’t cover, and where to find your state’s exemption laws.

How Bankruptcy Exemptions Protect Your Property

There are two types of bankruptcy exemptions, but you'll only use one. In addition to the federal bankruptcy exemptions, almost every state has its own set that filers must use. However, a handful of states allow filers to use federal exemptions if they determine that doing so protects more property. (11 U.S.C. § 522(b).)

You'll want to determine which exemptions you can use and ensure you have the correct list. If your property is on it, you keep it. If you’re married and filing jointly, many states let you and your spouse each claim a full exemption amount, so you effectively double your protection for jointly owned property. This isn't universal, so check your state's laws carefully.

Will You Keep Your House and Car in Bankruptcy?

In many cases, yes. Bankruptcy’s fresh start wouldn’t mean much if it stripped you of your home or vehicle. But it isn't guaranteed. Whether you keep a specific house or car depends on how much equity you have and whether your state’s exemption covers all of it, as shown below. 

Important note. If your home or vehicle is financed, you'll also need to make provisions for the monthly payment. If you're filing for Chapter 7, it's best to be caught up on payments before filing. In Chapter 13, you can pay arrearages over time through the repayment plan.

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 in the house she lives in (her residence). Because Caity has $50,000 in equity, not more, she’ll be able to keep her house in Chapter 7 bankruptcy if she’s current on her house payment when she files and can keep paying it going forward. If Caity were to file for Chapter 13, she could keep her house even if she were behind on her house payment, as long as she has enough income to pay her monthly house payment and the arrearages in a three- to five-year Chapter 13 repayment plan.

Example 2. Ben owes $400,000 on his house, which is 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’ll lose it in Chapter 7 bankruptcy. The trustee assigned to his case will sell the house, apply the $150,000 homestead exemption, deduct sale costs and the trustee’s fee, and distribute the remainder to creditors. If Ben filed for Chapter 13, he could keep his house as long as he had enough income to make the monthly house payment and pay creditors for the $50,000 in nonexempt equity through the repayment plan.

Learn more about protecting your home in Chapter 7, or, if you’re behind on your house payment or have nonexempt equity, you'll want to explore the requirements for keeping your house in Chapter 13 bankruptcy.

What Happens to Property That Isn't Covered by a Bankruptcy Exemption

Nonexempt property—anything an exemption doesn’t cover—gets treated differently depending on your chapter.

• In Chapter 7, a trustee typically sells nonexempt property unless it wouldn't net enough profit for creditors. The trustee would abandon the property, and you'd retain it.
• In Chapter 13, you keep it, but you must pay its value (minus the cost of selling it had you filed for Chapter 7) through your repayment plan.

Losing Nonexempt Property in Chapter 7 Bankruptcy

The Chapter 7 bankruptcy trustee overseeing your case can’t sell your exempt property. But the trustee can sell nonexempt property, too—think a second car or home, a boat or RV, pricey jewelry or art, valuable collections, or non-retirement investment accounts. 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.

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 discount, usually about 20%. The deal will depend on how much the trustee would save on sales costs.

Example. 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. (11 U.S.C. § 554.)

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, because you must pay the value of your nonexempt property through your repayment plan. (11 U.S.C. § 1325.)

If you can’t afford the payment—and many people can’t, because nonexempt equity can drive up a monthly payment fast—the judge won't confirm your plan in Chapter 13 bankruptcy. Keep good records if you try to get around this problem by selling assets before filing. You can always sell property and use the funds for your expenses, but 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 (click the link and scroll down to the middle of the article for the link to your particular state). Because mistakes can be costly, it's of utmost importance to read the exact code section to confirm it applies to your property or talk with a knowledgeable bankruptcy lawyer before you file.

Also, if you've moved states within the last two years, the exemptions that apply might be based on your prior state of residence. You'll want to check the two-year residency rule before assuming your current state's list applies.