When you file a Chapter 7 “straight bankruptcy” case, usually you can keep everything you own. These 10 points show how this works.
Property exemptions usually protect all that you own, but they are trickier than may seem: Exemptions are categories of protected assets, usually with a maximum dollar amount. There’s much more to the process than just simply matching assets to exemptions. The exemption categories are often not straightforward about which of your assets they cover. For example, if you own tools and equipment from your prior business, do they qualify under the “tools of trade” exemption if you’re not currently using them but hope to in future employment? Understanding the exemptions requires being familiar with court decisions, plus how the bankruptcy trustees and judges are informally interpreting them.
Federal and state exemption schemes: Congress has given each state the right to decide whether or not to allow its residents to use a federal set of exemptions (found in the Bankruptcy Code), or instead have to use a set of exemptions created by the state. When you have a choice, you have to uses only the federal or state one—you can’t pick and choose among the various state and federal exemptions. Choosing between the federal and state sets of exemptions (when you can) is a crucial and often not obvious decision.
You have to qualify to use a state’s set of exemptions: You must have been “domiciled” in your current state for two full years before filing bankruptcy to use the set of exemptions available to residents of that state. Otherwise you use the exemptions where you were “domiciled” during the 6-month period immediately before those two years.
Careful planning before filing bankruptcy can protect assets that otherwise would not be protected by exemptions: You have to be very careful about selling or giving away assets before filing bankruptcy. In your bankruptcy documents you give information about property transactions that happened before filing bankruptcy. These transactions—mostly sales and gifts of assets—are reviewable by the trustee and/or creditors. In some circumstances these sales/gifts can be undone, causing you significant problems. You could jeopardize your ability to get a discharge of your debts, and even expose yourself to criminal liability. However, there often ARE ways to protect otherwise vulnerable assets. This pre-bankruptcy planning can be valuable, but only when done under the guidance of a competent bankruptcy lawyer.
Chapter 7 trustees can use a fair amount of discretion: Some trustees are tougher than others in pursuing your assets. Most of the time you should have no surprises if you are represented by an experienced bankruptcy lawyer. But your situation can get complicated if you have an unusually assertive trustee. Asset values are to some extent a matter of opinion. So a trustee may believe an asset’s value exceeds the exemption when you believe it does not. Your lawyer cannot usually know in advance which trustee you will get, essentially planning on the “worst” of them.
Be thorough about your assets: If you don’t include any meaningful assets in your bankruptcy documents that can jeopardize your entire case. In extreme cases it could even lead to criminal charges against you. Failing to list an asset which would have been exempt could also result in losing the right to that exemption. That could lead to potentially losing that asset.
The trustee doesn’t always take an unprotected asset: Bankruptcy trustees can decide not to take an asset even if it is either partly or completely not exempt. Why not? Because:
the asset is not worth enough to justify the trustee’s efforts to collect or liquidate it (insufficient assets);
the trustee does not want to risk paying expenses to collect or liquidate an asset only to get no or little money in the end (risky assets, such as attorney or court fees); or
the asset is burdened with downsides which arguably outweigh its potential liquidation benefits to the trustee (burdened assets, such as real estate polluted with hazardous waste).
Consider paying the trustee for the right to keep a non-exempt or partially non-exempt asset: To keep an unprotected asset, paying the trustee may be a good option for you. It may be better than losing an asset you need, or filing a 3-to-5 year Chapter 13 case just to save it.
Sometimes it’s OK for the trustee to take an asset: You may not need something and actually appreciate leaving the liquidation hassles to the trustee. This may actually work in your favor if the trustee would use some of the proceeds of sale to pay a debt you want paid, such as taxes or back child support.
The difference in exemptions under Chapter 7 and 13: Although the set of exemptions used under both chapters is the same, they’re applied differently. In Chapter 7, the exemptions determine whether you get to keep everything. The trustee can take non-exempt assets from you, sell them, and distribute their proceeds to your creditors. In Chapter 13, the exemptions determine whether there are any non-exempt assets, and how much they’re worth. That affects how much you pay your unsecured creditors over the life of the Chapter 13 plan.