One of the hardest parts of going through bankruptcy is having to watch your belongings being taken from you. This is also known as the liquidation phase.
During this phase, a bankruptcy trustee will be appointed to manage your bankruptcy estate (the property that you have to forfeit). The trustee calculates the value of your property so that when it’s time to sell, money is properly distributed to your creditors. However, not all of your property will necessarily become part of the bankruptcy estate.
Under Chapter 7 bankruptcy, you can file for certain exemptions and protect a fair portion of your possessions from being sold off.
How Exemption Works
To exempt some of your property from liquidation, you must file a schedule of exempt property with the court. The possessions that qualify for exempt status are items considered necessary for living and working. Each state has its own exemption laws, but there are federal exemption laws as well. However, the majority of states require that you use their own laws. This can be complicated, so you’ll likely need a bankruptcy attorney to help you while going through the exemption process.
Commonly Exempted Property
- Motor vehicles, up to a certain value
- Jewelry, up to certain value
- Tools of your trade or profession, up to a certain value
- A portion of equity in your home
- Necessary clothing
- Necessary household goods and furnishings
- Household appliances
- Cash, bank accounts, stocks, bonds, and other investments, up to a certain value
- Pensions
- A portion of unpaid but earned wages
- Public benefits: welfare, social security, and unemployment compensation, saved in a bank account
- Damages awarded for personal injury
Commonly Non-exempted Property
- A second vehicle
- A second home
- Family heirlooms
- Stamp, coin, and other valuable collections
- Expensive musical instruments, unless you are a professional musician
The amount of property that you’re allowed to keep depends on:
- How much you owe
- The value of your property
- The exemption laws under which you are filing
An Example
For example, if your car is worth $4,000 and the law says you are allowed to exempt up to $5,000, you can keep it. Now say that you own a car valued at $11,000. Under the same exemption amount, the bankruptcy trustee would likely sell your car, paying you $5,000 and giving the rest to your creditors.
For the trustee to sell your property it must also prove equitable to do so. For instance, if you own a guitar valued at $2,100 and the exemption laws allow you $2,000 worth of musical instruments, the trustee will likely not sell the guitar.
This is because the trustee also has to make some money on the sale on top of paying off your creditors. If they don’t feel they can do both, they’ll likely walk away from it.
With enough strategy, you can stand to make it through Chapter 7 bankruptcy with a fair portion of your belongings. The purpose of bankruptcy is to get you back on your feet, not strip you of all that you have.
For more information, see our Chapter 7 Bankruptcy page.