IF I FILE BANKRUPTCY, WILL I LOSE EVERYTHING?
Posted on 03 14,2015
You may be surprised to learn that in the overwhelming majority of bankruptcy cases filed, the Trustees do not take any assets to sell for creditors. That means that bankruptcy filers are usually able to keep everything that they decide to keep.
Why would they choose not to keep something they own? People who file bankruptcy will commonly take advantage of the opportunity to walk away from something that it no longer makes financial sense to keep, like a house that is now worth far less than what is owed on it, or an unreliable vehicle with high monthly payments. They choose to surrender these burdens back to the lender, and the bankruptcy discharges all of the debt so the borrower is not left owing any of the balance.
Bankruptcy filers are able to keep most what they do wish to keep for several different reasons.
The first is liens. For anything you own that you are still making payments on, a lender with a security interest in it (also called a lien holder) has priority over other creditors and the Trustee. That means that only the equity in the item counts towards your assets. So if you are financing a car that now worth $8,000 but you owe $12,000, the bankruptcy Trustee has no reason to take it. If the Trustee sold it, the $8,000 would not go to the bankruptcy estate but just back to the lender who holds the lien against it. The car is worth $0 to the Trustee even though it may be worth quite a lot to you.
The second is cost of sale. A $200,000 house may have a mortgage balance of only $190,000, but the Trustee would still have to pay a realtor and other administrative costs before any of that apparent equity would be available to pay other creditors. The net proceeds would still end up less than the amount owed on the mortgage, leaving nothing for the Trustee to give other creditors.
The third is exemptions. The things that are paid for or have more equity in them are assets that could be sold by the Trustee to raise funds for other creditors. This is where the law steps in to protect bankruptcy filers by allowing them to claim a certain amount of their assets exempt from the bankruptcy. Our attorneys will help you claim all of the exemptions available to you and to maximize the use of your exemptions. Every state has its own list of exemption laws about what you can keep. Some of them have limits on the value and some of them are unlimited.
For example, if you have lived in Virginia at least two years you will be using Virginia's bankruptcy exemptions. Virginia allows you to exempt $5,000 worth of family heirlooms, but anything in excess of that value could be claimed by the bankruptcy Trustee. However, wedding and engagement rings have an unlimited exemption, which means you can keep those no matter how much they are worth. And if the ring is both your engagement ring and a family heirloom, you can claim the exemption most favorable to you, the one unlimited in value.
What happens if you have something that cannot be fully exempted and cannot lose? There are at least two alternatives. In a Chapter 7, if you have something that is worth more to you than to anybody else, then it is logical for the Trustee to sell it back to you because the estate will get the money more easily and surely than trying to liquidate or sell the asset to anyone else. But the most common way to preserve the asset is to file a Chapter 13 repayment plan. In a Chapter 13, as long as you are paying as much to creditors over the course of three to five years as they would have gotten in a Chapter 7, you can keep whatever you want.
So if you have $8,000 in net assets that you cannot exempt, but you file a Chapter 13 that pays more than $8,000 to your unsecured creditors then you can keep it all anyway.
Proper planning can make a big difference to getting the most out of your bankruptcy. Even in Chapter 7s, most cases can be filed without giving anything to the bankruptcy Trustees so don't assume the worst!
If you are planning on filing for bankruptcy, do not hesitate to call on our firm for help from a skilled and knowledgeable attorney.