bankruptcy law: What You Need to Know

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Bankruptcy Law: What Can I Keep?

Bankruptcy law is a complicated subject, made even more so by recent changes in the bankruptcy codes. When you are considering filing, you may be overwhelmed by the sheer amount of information available, as well as by the technicalities of bankruptcy law. A simple question like, “Can I keep my house?” is not a yes or no answer. The answer is, “It depends.” On the state in which you live, on the value of the house, on the amount of debt owed. Here is a place to start.

Q: Can I keep my house?

This is central to most people’s decision on whether to file for bankruptcy. If you want to keep your home, filing for chapter 13 is a better option. If you keep making regular mortgage payments, you can keep your home. If your mortgage is in arrears, you may be able to repay the money as part of your chapter 13 repayment plan and continue making your payments. Chapter 7 is a more complicated matter: because bankruptcy law calls for the liquidation of assets in chapter 7, your home may be at risk.

If you own your home and have a mortgage and the equity exceeds the amount of the debt, the trustee may sell the property to pay creditors. If you don’t have enough equity to cover the cost of the loans, the trustee will exempt the property, so you can keep it if you keep making regular mortgage payments. This is the case with most people who file. Whether or not the equity in your home is exempt varies depending on which state you live in. For example, Texas exempts the equity in your home. So, if you own a house with $50,000 in equity, you can keep your home even if the equity is more than the debt. Say you live in Maryland and have $50,000 in equity in your home and your debt is $25,000. You would be required to liquidate it to pay the debt. If this is the case, then you will want to strongly consider filing for chapter 13 bankruptcy instead of chapter 7.

The vast majority of people who file for bankruptcy can keep their homes. To be sure, it is a good idea to consult an attorney (often, initial consultations are free) and see what your state’s homestead exemptions are.

Q: Can I keep my car?

The answer to this question is usually “Yes.” Say you bought a car two years ago and still owe more than the car is worth. This car is most likely going to be considered exempt. Under chapter 13 bankruptcy law, you are responsible for the entire amount of the car loan if you bought it within two and a half years of filing rather than just the book value. If you don’t choose to keep the car, you can opt for “voluntary repossession,” in which you surrender the car to the creditor.

Under chapter 7, the law varies state to state or by federal standards. Under federal exemption laws, you can keep $3225 of the equity in your car. If you car is worth less than that amount, then it is exempt. If it is worth more, then the trustee can sell it, give you $3225, and pay the remaining amount to creditors. In general, if something costs more to sell than it is worth, the trustee will exempt it. Different states have varying exemptions for vehicles, however. For instance, in South Carolina, the vehicle exemption is only $1200.

Q: What else can I keep?

Usually, you can keep most of what you own. Things like clothing and household appliances are usually exempted by the trustee because they are not worth the trustee’s time and effort to sell. They won’t bring in enough money. About eighty-five percent of bankruptcy filings are considered to be “no asset filings” meaning that the debtor will not have to give up his or her possessions.

There is no guarantee that you will be allowed to keep your home, your car, or other possessions. A majority of people do not have to give these items up, but that does not mean you will have the same fortune. Bankruptcy law can be complicated; you should always check with an attorney to make sure that by filing you are not putting your home at risk. Better still is avoiding bankruptcy. Options include cutting your expenses, budgeting money more effectively, or consulting with a debt settlement service.