Bankruptcy is scary to a lot of folks, and for good reasons. Not only will it negatively impact your credit, but you’ll also have to deal with the societal stigma associated with it. However, the main question that lingers in the mind of many people when contemplating declaring bankruptcy is: Would I lose everything? What do I get to keep?
The answer to this question depends on a variety of factors, but the most crucial one is the type of bankruptcy yoau file for. In the United States, there are two types of personal bankruptcy:
Chapter 7
This is also referred to as ‘liquidation bankruptcy,’ and it is the most common type. Under this chapter, most of your non-exempt assets are sold to repay part of your debts. The outstanding unsecured debts after payment is made are forgiven. This process takes between 3 and 6 months.
Chapter 13
Under Chapter 13, none of your assets are sold. Instead, the court comes up with a repayment plan for you to pay off part or all of your debts within a 3 to 5-year period. However, you need to stick to the court-mandated repayment plan that your creditors agree to. If not, you risk losing your property.
To qualify for Chapter 13, you cannot have more than $394,725 in unsecured debts (like credit cards, medical bills, and student loans), and $1,184,200 in secured debt (like mortgage and auto loans).
Will I Lose My Home?
You won’t under Chapter 13.
However, under Chapter 7, it depends on two major factors, which include:
Whether your mortgage is current
If you’re way behind on your mortgage payment when you file Chapter 7, you’re likely to lose your home. Although the automatic stay will temporarily suspend foreclosure, it’ll eventually happen in a few months.
Your home equity
If you’re up-to-date with your mortgage payments, then the next step is to determine how much home equity you have. Home equity is the value of a homeowner’s interest in their home. It is calculated by subtracting an outstanding mortgage balance from the home value. If your home equity is high, the trustees can decide to sell your home to pay off creditors.
There are federal and state exemptions that can help you protect a certain percentage of your house. The current maximum federal home exemption is $23,675 (and double that for couples).
If your home equity is less than the exemption, there’s no point selling the house from the trustee’s perspective. However, note that your creditor can move forward with foreclosure after the bankruptcy proceedings are over, especially if you get behind on your mortgage payments.
On the other hand, if you have way more than that, your home will be sold off to pay your debts but you’ll receive the exemption amount (in this case, $23,675).
Will I Lose My Personal Properties?
When a person declares bankruptcy, their valuable personal assets are sold. Examples include jewelry, furniture, antiques, books, appliances, musical instruments, and any other thing of significant value. However, there’s an exemption of about $12,625, meaning that value in terms of your assets is protected.
Will I Lose My Car?
If you can keep up with your car payments, then it’s unlikely you lose it. However, if you can’t keep up, it depends on the worth of the car, how much you owe, and the amount your state allows you to exempt. The exemption can be as low as $500. If your equity in the car is higher than the exemption amount, your car might be sold off but you’ll receive the exemption amount. Note that this rarely occurs.
Will I Lose Any Cash?
Again, you won’t under Chapter 13. On the other hand, almost all of your cash in hand will be taken to settle off your debts under Chapter 7. If you owe a bank, they can remove your debt from any of your accounts.
Although, there are some exemptions. Alimony, child support payments, and public benefits like Social Security, unemployment, and disability payments cannot be tampered with. Similarly, your retirement accounts and pension are also protected.
Will I Lose All My Non-exempt Assets?
As you’ve probably noticed by now, exemptions allow you to keep part of your properties, even after declaring bankruptcy. However, what happens to your non-exempt assets. As you have seen, the trustee has the right to sell them to pay off creditors, but this doesn’t mean that all of your non-exempt assets will be sold.
First off, if the time and money the trustee will spend taking and selling the item is more than the item’s worth, then you get to keep it. For instance, if you own a second car that’s worth about $4,000 and you still owe $3,500 on it, this means you only own $500 in the car. Therefore, the trustee might deem it fit not to sell it.
Even if the property is worth more, you may be able to negotiate with the trustee, but you’ll have to give up something. In most cases, you will have to trade an exempt property of similar value.
Finally, you can offer to buy back your non-exempt property if you can come up with the cash.
Bottom Line
When declaring bankruptcy, what you get to keep and lose primarily depends on what type of bankruptcy you file. Under Chapter 13, all of your assets are protected, but you have to stick to a repayment plan to clear off part or all of your debts within the next three to five years. On the other hand, under Chapter 7, most of your non-exempt properties may be lost.
Irrespective of the type of bankruptcy you file for, your credit score will take a massive hit. Your bankruptcy filing will also stay in your credit report for up to 10 years. That’s why bankruptcy should only be considered as a last resort to give you a fresh start are restructuring your financial life.
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