What property can I keep in a bankruptcy?
For the everyday person this is often the most technical aspect of their bankruptcy. The answer varies depending on whether you file a Chapter 7 Liquidation or a Chapter 13 Reorganization.
Typically in a Chapter 7 Liquidation there is no payment plan. Instead the debtors property is sold off at auction to pay his debts. However the debtor in Chapter 7 can choose to protect a limited amount of assets. What type of property you can protect and how much of that property is governed by state and Federal law.
Typically under Florida law a single debtor is allowed to keep $1,000 in any type property, $1,000 of equity in a motor vehicle, and their homestead. If the debtor does not have a homestead or chooses not to use the homestead exemption they are granted an additional $4,000 for any type of property.
If you and a spouse file together that makes two debtors allowed to keep $2,000 in any type of property $2,000 of equity in a motor vehicle, and their homestead. If the debtors do not have a homestead or elect not to use the homestead they get an additional $8,000 for any type of property.
Though the amount of property you are allowed to keep is small there are ways to stretch your exemptions to provide better protection. As an example it is important to value property at a reasonably low value. Household goods, clothes, and furniture should have garage sale value.
Cars, motorcycles, and other big ticket items should be appraised. NADA value which is the Bankruptcy Court’s proffered method of valuation is typically much higher than an actual real appraisal. Often times a car dealership will appraise your automobile for free in hopes of your future business.
As another example your automobiles value for bankruptcy liquidation purposes is only how much equity the vehicle actually has. Therefore if you believe that bankruptcy is in your future it is a bad idea to attempt and pay ahead on your car loan. This same principle holds true for houses, recreational vehicles, and any other type of property you own that is collateral for a loan.
There are other types of property that receive special treatment and are 100% protected under the law. As an example retirement accounts, social security, unemployment, alimony, child support any many other types of government or retirement benefits are protected and do not require coverage with the basic $1,000 or $4,000 protection. This includes the accounts or benefits themselves and disbursements made from those account that may be sitting in your bank account. In most cases you will not be required to surrender special retirement, support, or government benefit property in a bankruptcy.
It is a terrible idea to cash out retirement plans to pay secured loans. That is because you are taking 100% protected property and creating equity in non protected property that can be sold in the bankruptcy.
Joint marital property is also exempt from bankruptcy under Florida law in the event that the debts belong to only one spouse and that spouse is filing for bankruptcy without the other. Therefore in the event you and your spouse are planning on taking out a loan or credit card it would be advantageous to have only spouse sign the loan or credit contract if it is possible.
In the event you are over your allotted exemptions your property can be sold. This does not mean that your creditors will rummage through your house looking to squeeze every penny out of you. A trustee will not sell your property unless the sale makes sense financially. A trustee will auction off your $50 couch because it’s more expensive to come to your home pick it up and pay an auctioneer to sell it.
Trustee’s typically focus on bigger ticket items like vehicles, empty lots, and savings accounts. In the event a trustee wants to sell your bigger tickets items you are offered the option to purchase it back yourself with a payment plan. If the property is a bank account the Trustee will just take the cash that is why it is important to exempt your cash first, or file your bankruptcy at a time when your bank accounts are low. That is when you pay all your monthly bills but before your next paycheck.
If the payment amount is low then Chapter 7 is a sound option. If the payment amount is significant because you have a lot of valuable assets then a Chapter 13 is ideal because the payments can be spread out over a longer period of time. In either case realistic goals and a solid plan will help you achieve the most beneficial outcome.
You should always consult with an attorney prior to making any major decisions if you are thinking of filing for bankruptcy. In addition this article is not all inclusive; there are thousands of different property exemptions that vary from state to state.