Will I Lose Everything If I File For Bankruptcy?

The fear of losing everything is a common concern among those considering bankruptcy, but the reality is that bankruptcy laws are designed to provide a fresh start while allowing you to retain essential assets. The impact of bankruptcy on your assets depends on several factors, including the type of bankruptcy you file, the exemptions you’re eligible for, and the specific assets you own.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, also known as liquidation bankruptcy, a bankruptcy trustee may sell certain non-exempt assets to pay creditors. However, not all assets are subject to liquidation thanks to exemptions.

• Exemptions: Both federal and state laws provide exemptions that protect certain types of assets up to specific values, such as equity in your home (homestead exemption), a vehicle up to a certain value, personal belongings, household goods, and retirement accounts. The exact exemptions available to you depend on your state’s laws, as some states require you to use state exemptions while others allow you to choose between state and federal exemptions.
• Non-Exempt Assets: If you own luxury items, second homes, or other non-essential assets with significant value, these may be at risk of liquidation in a Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, known as a wage earner’s plan, allows you to keep your assets while you make payments to creditors under a court-approved repayment plan, typically over three to five years.

• Asset Retention: The key advantage of Chapter 13 is that it enables you to retain your assets, including those that might be considered non-exempt in a Chapter 7 case, as long as you continue to make your plan payments.
• Repayment Plan: The amount you pay in your Chapter 13 plan is influenced by your disposable income, the value of your non-exempt assets, and the total debt you owe. Successfully completing your repayment plan leads to the discharge of remaining eligible debts.

Real-Life Implications

Consider the case of “John,” who filed for Chapter 7 bankruptcy with significant credit card debt and medical bills. John owned a modest home with a small amount of equity, a used car, and typical household goods. Using his state’s homestead exemption, he protected the equity in his home. His car and household goods were also protected under personal property exemptions. John was able to discharge his unsecured debts without losing his home or car.

In another scenario, “Sarah” chose Chapter 13 bankruptcy due to a higher income and the desire to catch up on missed mortgage payments to avoid foreclosure. Sarah’s repayment plan allowed her to keep her home and car by making regular plan payments, demonstrating how Chapter 13 can protect assets while addressing debt.

While the prospect of filing for bankruptcy can be daunting, understanding the protections offered by bankruptcy exemptions is crucial. Most people who file for bankruptcy are able to keep their primary residence, vehicle, and personal belongings. Consulting with a knowledgeable bankruptcy attorney can provide clarity on how bankruptcy might affect your specific assets and help you make an informed decision based on your financial situation and goals.