Filing bankruptcy doesn’t have to mean losing all of your property

People considering bankruptcy often have the misperception that they will lose all of their property if they decide to file. Fact is, only non-exempt property will be eligible for sale in a chapter 7 bankruptcy.

What does this mean?

As a matter of public policy legislatures at both the state and federal levels have enacted exemption laws to ensure that those who seek bankruptcy protection are able to retain property through the process. Exemption laws vary by state and designate certain property that is exempt or protected from creditors.

An example using real estate

For example, let’s say a state’s homestead exemption allows a married couple filing a joint bankruptcy case to protect $37,500 of equity in their home. Therefore, assuming they could afford the mortgage payments after bankruptcy, this theoretical couple could keep a $500,000 home through the bankruptcy process as long as home equity does not exceed $37,500 (as long as the mortgages encumbering the home added up to about $460,000). Equity is calculated by subtracting debt on the property from its value. The entire value of property is not the determining factor for exemption purposes.

The same principle applies for cars

The same principle applies for cars. If you currently owe $10,000 on a car that is worth $12,000, most exemption statutes will allow the $2,000 of equity in the car to be protected from your creditors. You will be able to file bankruptcy to shed burdensome debt while retaining your car.

When you think about it, the application of the laws make sense. We no longer have debtor’s prisons. People in financial peril need relief, and often the Bankruptcy Code is the means to receiving this relief. Could a consumer truly obtain a fresh start financially if they were left with no home and car? Of course not. Therein lies the policy justification for exemption laws. Consumers who find themselves in financial trouble must be left with some property so they can get back on their feet.

Even is stuff is sold, you’ll receive a check for the amount of the exemption

It should be noted that even if you have non-exempt equity in property, you may have the option of paying the value of the non-exempt portion of the property to the bankruptcy trustee in order to keep it. If the property is sold by the trustee, you will still be entitled to a check for the value of the exemption. To harken back to our homestead example, if you had $60,000 of equity and the trustee sold your real estate, you’d get a check for $37,500 after the sale. A sale does not defeat the exemption.

Then there’s always chapter 13 bankruptcy

Alternatively, chapter 13 bankruptcy can provide a nice solution for consumers who want to get their debt under control but have significant non-exempt assets. Chapter 13 bankruptcy allows debtors the option of paying out the value of non-exempt property to their creditors over time while slashing credit card debt and other unsecured debt. It is important to consult with a knowledgable bankruptcy attorney in order to determine the effect that your state’s exemption laws will have on you and your property.

Rob Cohen

Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.
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