What will you lose if you file for bankruptcy?
The classic legal answer to that question applies: It depends. Generally, you will not “lose anything,” but the exact answer depends on your particular circumstance and the type of bankruptcy you file.
Under the Bankruptcy Act, a debtor is granted exemptions that permit them to keep certain basic assets, such as clothes, some equity in a home, a paid-for vehicle of a specific value, and other personal effects.
The amounts and type of items you can protect with exemptions vary by state, and a bankruptcy attorney can help you determine how they apply in your situation.
Items like your clothes and some other household goods are covered by the exemptions. High-value items, like some jewelry or expensive furniture, could in some cases be claimed by the trustee as property of the estate. Generally, most items would be more trouble than they would be worth, once all the administrative cost of selling them is considered.
They, however, will be interested in any transfers of valuable assets to your family or friends that occur shortly before you file bankruptcy. Say you own a $150,000 home, free and clear. If you were to transfer it to your children and then file bankruptcy, the trustee would likely file an adversary proceeding to return the home to the “bankruptcy estate.”
The Bankruptcy Estate
When you file a bankruptcy, a trustee is responsible for determining if you have assets that can be used to pay your debts. In Chapter 7, most debtors have no assets that are available to the trustee.
The personal property of the debtor is typically covered by the exemptions. Because of this, the vast majority of Chapter 7 filings are known as “no asset” cases. This allows most Chapter 7 cases to be completed and the debtor receives their discharge in 180 days or less.
In a Chapter 13, the debtor may have more assets, such as a home or a car, and the centerpiece of the Chapter 13 is the debtor’s repayment plan, which usually lasts three to five years. The debtor develops a plan, often with the help of a bankruptcy attorney, which functions like a household budget for the remainder of the bankruptcy.
The plan allows the debtor to allocate a portion of their income to cover their necessary expenses. They then must pay the mortgage payment on their home and car loan payments. Any remaining disposable income is then allocated to repaying the other unsecured debts, such as credit cards or other loans.
A Fresh Start
Bankruptcy, by discharging most debts (Chapter 7) or allowing a reasonable time to pay significant debts, like a home mortgage or car, and discharging a portion of other debts, is designed to provide a debtor with a “fresh start” and begin anew financially.
The process can be quite intimidating and developing a viable Chapter 13 plan is both complex and requires adequate income and discipline, and a bankruptcy attorney can explain the process and help you create plan that will allow you to successfully complete your bankruptcy.