Most people think that if you file for bankruptcy relief you lose everything. The truth is:
Most people who file bankruptcy keep everything they have:
their home, their car, their furnishings, their jewelry.
This is because you can’t receive the fresh start that is the goal of a bankruptcy filing if you emerge from your case destitute. As early as 1885, in the U.S. Supreme Court case of Traer v. Clews, the Court stated that, “The policy of the bankruptcy act was to discharge him from his debts and liabilities, and enable him to take a fresh start.”
How does this work?
The Bankruptcy Code allows people “exempt”,or keep, some or all of their property and assets.
Exemptions let you keep assets that could be sold or liquidated for less than a specific dollar amount (such as the first $5,000 in a bank account, or tax refund worth less than $1,000) or a specific type of item, regardless of value (such as a 401(k), or in some states, a family bible or wedding set). An exemption may be a wildcard, meaning that you pick what you want to apply the exemption towards. Maryland and DC have homestead exemptions, which let you exempt some or all of the equity in your home.
If something isn’t exempt, or if you run out of wildcard exemptions, one of several things will happen: if the asset has value, the Chapter 7 bankruptcy Trustee can sell it and distribute the proceeds to your creditors. (This can't happen in a Chapter 13 case.) If the asset has no or minimal sale value (family photos, your 1983 Chevette with 200,000 miles or an old couch) or has no equity (a car or house that’s worth less than the loan you have on it) you usually can keep it. And even if an asset has value, the Trustee may decide that selling it is more trouble than it’s worth, or won’t bring in enough to justify the effort to sell it, and will abandon the asset (meaning you keep it).
Most Chapter 7 cases are ‘no asset’ cases, meaning that the Chapter 7 Trustee doesn’t think that there are any non-exempt assets with enough value to sell. In a no asset case, the person who files keeps everything.
Not everyone can use the same exemptions. Federal law sets certain exemptions, but some states, such as Maryland, require you to use only the state exemptions. Others let you choose which exemptions are better for your situation. Which exemptions you can actually use depends on which state you live in. In Maryland, for example, you cannot use the federal exemptions and can use only Maryland exemptions. Just to the north, in Pennsylvania, you can choose either the federal or the state exemptions. And just to the south, in the District of Columbia, you can only use the federal exemptions. In other words, it can be pretty confusing what you can exempt. This is one of many areas where an experienced bankruptcy attorney can be a big help.
Let me give an example that may help explain things. First some facts, then the explanation:
Mary Jones lists the following assets on her bankruptcy schedules:
A house worth $200,000, with a $190,000 mortgage. A 1983 Chevrolet Chevette with 200,000 miles, worth $500 A 2017 Toyota Corolla with 34,000 miles, worth $8,500, on which she still owes $12,000 Cash of $25 A bank account with $200 Clothing worth $100 Household goods and furnishings worth $2,600 Books, pictures, CDs, DVDs, etc. worth $150 Jewelry worth $400 A 401(k) with $43,000 10 shares of stock worth $340 US Savings bonds worth $500 A 2 year-old computer, printer and software. A worker’s compensation claim that hasn’t been decided yet
(Note that these items are valued at liquidation prices, meaning what they would sell for if you had to sell them. This is not replacement value, or what it would cost if you had to buy the item new. It’s what you could get if you had to actually sell it. Clothing is worth little, as are most used household items and furniture. Jewelry doesn’t usually bring in much more than pawnshop prices, and used computers aren’t worth a lot. Bank accounts, stock, bonds, and cash are listed at their actual value, the house and cars for what you could sell them for.)
Ms. Jones has a fairly typical case. And in her case, she would likely keep everything she owns.
Here’s why:
The house has no equity; after the expenses of sale (typically 8-10%), there would be nothing left to distribute to creditors, so the Trustee won’t even try to sell it.
The old car has no resale value, and the newer car has no equity.
Under federal law, IRAs, 401(k)s and other ERISA retirement plans are fully exempt.
All of the other assets can be exempted under the federal and most states’ exemption allowances.
In short, don’t think that you’ll automatically lose everything if you file for bankruptcy. Most people don’t lose anything.