What Happens to Your Property in Bankruptcy?
While bankruptcy can provide a fresh start for those struggling with financial difficulties, it can also come with significant consequences, particularly with regard to one’s property. In this article, we will cover what happens to your property and assets during bankruptcy.
Exempt v.s. Non-Exempt Property
In bankruptcy, the property is divided into two main categories: exempt and non-exempt. Exempt property is a property that is protected by law and cannot be seized or sold to pay off creditors.
Exempt Property Examples Include:
- Primary residence.
- Essential items, such as clothing, furnishing, and household appliances.
- Motor vehicles, up to a certain value.
- Tools necessary for an individual to participate in his or her trade.
Non-exempt property, on the other hand, is a property that can be seized or sold to satisfy outstanding debts.
Non-Exempt Property Examples:
- Cash (above a certain amount).
- Vacation homes and rental properties.
- Luxury items, such as jewelry, second vehicles, and artwork.
- Securities investments, such as stocks or bonds.
How Different Chapters of Bankruptcy Treat Your Property
The rules surrounding exempt and non-exempt property vary depending on the type of bankruptcy being filed. There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13.
In Chapter 7 bankruptcy, the non-exempt property can be seized and sold to pay off creditors. However, many types of property are protected by exemptions. In fact, the vast majority of Chapter 7 filers do not lose any property in the bankruptcy process.
Each state has its own set of exemptions that can be used to protect property in Chapter 7 bankruptcy. These exemptions vary widely from state to state, and some states also allow filers to use the federal bankruptcy exemptions instead of the state exemptions. Common exemptions include a homestead exemption that protects a certain amount of equity in one’s primary residence, exemptions for personal property such as clothing, furniture, and household goods, and exemptions for retirement accounts.
If a filer has a non-exempt property that is worth more than the exemptions available to them, that property can be seized and sold to pay off creditors. The proceeds from the sale are then distributed among the creditors in proportion to the amount they are owed.
Chapter 13 bankruptcy, on the other hand, does not involve the sale of non-exempt property. Instead, filers enter into a court-supervised repayment plan that lasts between three and five years. During this time, the filer makes monthly payments to a court-appointed trustee, who then distributes the funds to the creditors. In Chapter 13, the filer is allowed to keep all of their property, regardless of whether it is exempt or non-exempt.
While Chapter 13 filers are not required to sell any property, the value of their non-exempt property is taken into account when determining the amount they must repay to their creditors through the repayment plan. The more non-exempt property a filer has, the higher their monthly payments are likely to be.
How Does Bankruptcy Affect Ownership?
It’s important to note that bankruptcy only affects a filer’s personal liability for their debts. It does not affect the ownership of property that is secured by a lien, such as a mortgage or a car loan. If a filer is behind on their payments for secured property, the lender can still take legal action to repossess or foreclose on that property, regardless of whether the filer has filed for bankruptcy.
It’s also worth noting that bankruptcy can have an impact on one’s credit score and credit report. Bankruptcy stays on a filer’s credit report for up to 10 years and can make it more difficult to obtain credit in the future. However, many people find that their credit score improves after filing for bankruptcy, as their debt-to-income ratio decreases and they are able to rebuild their credit over time.
What You Need to Know
The impact of bankruptcy on one’s property depends on a variety of factors, including the type of bankruptcy being filed, the value of the filer’s property, and the exemptions available in their state. While Chapter 7 filers may be required to sell the non-exempt property to pay off creditors, many types of property are protected by exemptions, and the vast majority of filers do not lose any property in the bankruptcy process.
If you have questions about filing for bankruptcy and want to know how it affects your property, click here or call (833) 598-1595 for a free consultation.