Will I Lose My Property If I File Bankruptcy?

by Michael Sosna

We hear this question often: “Will I lose my house, my car and my other personal property, if I file bankruptcy?”

The simple answer is usually no.

Because bankruptcy law allows debtors to exempt – or protect – a certain amount of value (or equity if subject to a loan) in their home, their car, their household goods and other property, most debtors can fully protect all of their property from creditors and the bankruptcy trustee. And, in the rare instance where the value/equity of an item of property exceeds the allowable exemption amount, the debtor can increase the amount of his/her Chapter 13 plan payment to protect, and keep, the property in question.

A more detailed answer depends on which kind of bankruptcy you file.

A Chapter 7 bankruptcy is the “quick” bankruptcy, usually taking three to four months from start to finish. (For a more detailed discussion of Chapter 7 and Chapter 13 bankruptcy, see our article “What is the difference between Chapter 7 and Chapter 13?”) A Chapter 7 case is generally used if you have a significant amount of “unsecured” debt—credit cards, medical bills, etc.—but are current on your “secured” debts—mortgages , car loans, etc. (or if you are not current on your secured debts but you intend to “surrender” the collateral—the car, house, furniture, etc.).

Chapter 7 is known as a liquidation bankruptcy, because the Chapter 7 Trustee can liquidate – or sell – any non-exempt property and use the money to pay unsecured creditors. However, if all of your property is exempt, and thus protected, yours will be a “no-asset” Chapter 7 in which you receive a discharge of your debts and keep all of your property.

A Chapter 13 bankruptcy takes three to five years to obtain a discharge and is generally used if the debtor is behind in his or her secured debts – a mortgage loan for their house, a car loan, a furniture loan. In that instance, the purpose of the case is to keep your property and catch up the payments. In a Chapter 13, the debtor makes monthly payments to the Chapter 13 Trustee who pays the claims that need to be paid over the life of the plan. With respect to mortgages, at the end of the case, the mortgage arrears are paid in full and the mortgage is current. With respect to other types of secured debts (car loans, etc.), either the arrears or, more likely, the entire car or furniture debt is paid in full. As long as the debtor makes the monthly Chapter 13 plan payment, the creditor – the mortgage company, the car loan company etc. – is prevented from foreclosing or repossessing.

A Chapter 13 will also discharge your unsecured debts. In most cases, unsecured creditors receive only a small amount or even no distribution from the Trustee. In other cases—such as for high income clients—unsecured creditors will receive some distribution from the Trustee. Either way, at the end of the case, whatever remaining balance owed to the unsecured creditor is discharged (unless the debt falls under an exception to discharge, such as the exception for student loans; you should ask your attorney about debts that are not discharged).

Another instance is where you own property with “nonexempt equity” (i.e. the value or equity exceeds the amount that you can exempt under the law) that would otherwise be subject to liquidation by a Chapter 7 Trustee. You can still protect and keep the property in a Chapter 13 bankruptcy, so long as your Plan payment provides that your unsecured creditors will receive the amount they would have otherwise received if the Chapter 7 Trustee had liquidated (sold) the asset.

For example, let’s assume you have a car with a value of $5,000, but you only can exempt $3,500 of that value. In a Chapter 7 case, the Trustee could sell the car, give you back $3,500 – the value exempted – and use the remaining $1,500 to pay unsecured creditors. However, if instead you file a Chapter 13 and increase your Chapter 13 Plan to pay an additional $1,500 over the life of the Plan, say 60 months, then for a little more than $25 a month extra you are allowed to keep your vehicle and get your Discharge. This is because the unsecured creditors got paid what they would have received if the car had been “liquidated” in a Chapter 7 case.

As you can see, properly claiming your exemptions and protecting your property can be complicated. That is why you need an experienced bankruptcy attorney – like the attorneys at Sosna Law Offices, PLLC – to advise and guide you through the process, so you not only receive a discharge of your debts but also keep all of your property.