Will I Lose My Property and Money If I File For Bankruptcy?

The analysis for all of these questions is substantially the same.  Remember, bankruptcy was designed to provide the honest but unfortunate debtor a fresh start on their finances.  It was not built to leave you penniless and destitute, so no, you are not going to lose everything you own if you file for bankruptcy protection and you are not required to file for Chapter 13 bankruptcy only in order to protect your assets.  The vast majority of Chapter 7 bankruptcy cases filed are “no asset” cases, meaning that the trustee does not liquidate any assets held by the debtor.

You are, however, required to schedule every asset you own on your bankruptcy petition along with the fair market value of each item.  You do not have to schedule each item individually, as that would require every bankruptcy petition to be hundreds of pages long.  You can group similar items such as clothing, ordinary household goods, ordinary electronics, etc.  You will want to schedule any unique items or individual items of significant value separately.  The value of these items should either be provable, such as using an appraisal for a home or automobile, or a reasonable estimate of fair market value.

Once the assets are scheduled and properly valued, you then have the ability to apply exemptions to your assets to protect them.  Exemptions are laws that protect property that is reasonable and necessary for you to maintain a minimum standard of living.  Exemptions vary by state, with some states adopting the federal exemptions provided in the Bankruptcy Code and many others providing their own exemptions, based in state law.  An experienced bankruptcy attorney will advise you as to what exemptions are available to you and how to best apply them to maximize them and protect your assets.  

In Chapter 7, the bankruptcy trustee is only permitted to liquidate (sell) assets that are not protected by an exemption.  The trustee does have the right to object to exemptions, so you do want to ensure that they are properly claimed, and the trustee has the right to liquidate any assets that are not exempted, even if an exemption was available but not claimed.

In Chapter 13, assets are not liquidated, so there is no risk of loss of your property.  The same analysis is applied, however, to help determine how much of your debt you will be required to repay.

As stated above, exemptions can vary greatly from state to state, but some of the exemptions that are reasonably consistent between states include:

Homestead Exemption – This protects equity in your primary residence, usually up to a certain dollar amount.  There are certain states, such as Florida and Texas, that have unlimited homestead exemptions, but most cap the exemption.  

Motor Vehicle Exemption – This protects equity in one motor vehicle up to a certain dollar amount.  This usually cannot be split to protect multiple vehicles.

Household Goods Exemption – This protects ordinary household essentials such as furniture, appliances, electronics and other household goods up to a certain dollar amount.  Clothing is sometimes included in household goods and sometimes has its own exemption.

Tools of Trade Exemption – This protects tools and equipment that are necessary for your occupation up to a certain dollar amount.  This exemption is broader than it sounds, ranging from protecting a carpenter’s tools to a law enforcement officer’s sidearm.

Retirement Accounts Exemption – This protects qualified retirement accounts such as pensions, 401(k) accounts, 403(b) accounts and many IRAs.  In most states and under federal exemptions, this is an unlimited value exemption, protecting the entire balance of these savings.

Wild Card Exemption – This can be used to protect any asset that you choose to protect up to a specific dollar amount.  May jurisdictions allow you to use an unused portion of your homestead exemption as an additional wild card exemption up to a certain dollar amount.

States that elect to use their own exemptions will often have adopted specific exemptions to reflect their citizen’s values.  Some states exempt 529 educations savings accounts, others have a specific exemption for firearms, while still others exempt balances held in standard checking and savings accounts up to a dollar limit.  There are countless more state-specific exemptions out there.  

In some situations, you have the ability to “stack” exemptions to protect property more effectively.  A skilled tradesman’s tools may have more value than the tools of trade exemption allows, but the state’s exemption scheme may allow that person to use their wild card exemption on top of the tools of trade exemption in order to fully protect them.

These variations highlight why professional legal advice is vital in bankruptcy in order to protect your assets.