When filing for Chapter 7 bankruptcy, many debtors are able to keep most or all of their personal property. What you are allowed to keep depends on what property is deemed "exempt" by your state or the federal bankruptcy exemptions.
In Chapter 7 bankruptcy, most or all of your debts are eliminated (discharged). In exchange, you must give up certain property so that the trustee can sell it and use the proceeds to pay your creditors. However, state and federal law exempts certain types of property, and in certain amounts. If personal property is exempt, you get to keep it in Chapter 7 bankruptcy.
Which exemptions you can use depend on where you live, and whether your state allows you to use the federal bankruptcy exemptions. To learn more about federal and state exemptions, and for links to each state's exemption systems, see Bankruptcy Exemptions -- What Do I Keep When I File for Bankruptcy?
When it comes to personal property, states vary widely as to what is exempt, and in what amount. Types of personal property that are exempt in many states include a car (up to a certain value), household goods, clothing, jewelry, wedding rings, books, food, appliances, tools of your trade, and tax-exempt retirement accounts. Some states exempt firearms, provisions to last a certain period of time, livestock, and more.
Value each piece of personal property. You must value each piece of personal property (unless the property is exempt to an unlimited amount). Generally, value household items at distressed sale prices – in other words think of a situation where you would be taking whatever you can get for your property regardless of what you may have paid for it. Another way to think of it is this: use yard sale values.
Remember to double, if you can. If you are filing a joint petition with your spouse, many states allow you to double the exemption amount (essentially allowing each of you to claim the exemption amount separately).
Categorize carefully. Make sure you categorize your property correctly. For instance, if you work from your home, you may be able to exempt personal property related to your business under the tools of the trade exemption rather than the household goods exemption. This can help you to maximize your exemptions.
Use the wildcard, if there is one. The federal bankruptcy exemptions and many state exemption systems have a wildcard exemption. This means it allows you to exempt up to a certain dollar amount of any property.
Even if your personal property is not exempt, or the exemption doesn't cover the full value of your property, you still may be able to keep it.
Trustee abandons property. In many instances, the Chapter 7 trustee will abandon personal property (meaning the trustee will not take and sell it). This happens if the trustee does not believe that the sale of the property will garner anything for creditors -- that is, little or nothing will be left after the exemption, sales costs, and trustee's commission are subtracted from the sales price.
For example, say your car is worth $4,000. If your state motor vehicle exemption is $3,500, it will cost $500 to sell the car, and the trustee will take a $350 commission, the trustee will not bother to sell the car.
Other ways to keep nonexempt personal property. There are other ways to keep nonexempt personal property. For example, sometimes you can pay the trustee an amount equal to the value of the property in order to keep it. Or sometimes you can exchange another piece of exempt property in order to keep the nonexempt property.
For lots of free legal information about bankruptcy, check out our bankruptcy information page.
For a detailed explanation of how exemptions work in Chapter 7 bankruptcy and your options for keeping personal property, as well as step-by-step instructions on how to file for Chapter 7 bankruptcy, get How to File for Chapter 7 Bankruptcy, by Stephen Elias, Robin Leonard, and Albin Renauer (Nolo).