Once you’ve decided you need bankruptcy relief the next question is: “Can I keep everything I own under Chapter 7 or do I need Chapter 13?”
Your Assets Protected by Property Exemptions
Most people do not lose anything that they own free and clear when they file bankruptcy. That’s because the law protects certain categories of what you own, usually up to a certain dollar amount for each category. These protected categories are called “exemptions.” If everything fits within those “exempt” categories and amounts, then you can file a Chapter 7 “straight bankruptcy” and keep it all.
But if you own and want to keep something that is not covered by an allowed exemption, filing a Chapter 13 case would very likely protect it.
So ask your attorney whether everything you own is protected under Chapter 7 or whether instead you need the extra protection provided by Chapter 13.
A Good First Question
The reason this is a question that’s good to ask as soon as you’ve realized you need bankruptcy is that most people own only exempt possessions, and you should find out right away whether this is true for you. Usually this is something your attorney will be able to determine quite quickly for you. And if something isn’t protected, you and your attorney should address that at the very beginning of your decision-making process.
Not a Question to Answer by Yourself
This question is both an important one and much harder to answer than you might think.
It’s an important question because:
1) If you’re in such financial trouble that you need to be filing bankruptcy, everything you own is likely valuable to you so you don’t want to put any of it at risk.
2) You don’t want to lose anything unnecessarily and there are usually ways to prevent that from happening if addressed early.
Determining whether all you own is exempt is much more difficult than you might think. It involves much more than just looking down a list of property exemptions and comparing them to what you own. It’s a lot more complicated than that because:
1) I f you are a resident of certain states the applicable exemptions are found in state law, while if you are a resident of other states you can choose to use exemptions found in either state or federal law.
2) After figuring out which exemption law applies, the law often does not clearly delineate what assets fit within each exempt category. Besides the language of the statutes often being archaic and unclear, what assets fit or don’t fit within exemption categories can depend on state or federal court interpretations or even on the informal practices of the local bankruptcy trustees or judges.
3) The exemption laws change—the statutes themselves, the published and unpublished court interpretations, and the informal practices as trustees and judges change, sometimes with little or no notice. It’s impossible to keep up with these without working in the field full time.
4) If you’ve moved in the last couple years from one state to another, sometimes you apply the exemptions of your prior state and sometimes those of your new state.
Chapter 13 as a Possible Way to Save Non-Exempt Assets
If you find out that something you want to keep is not exempt and protected, then Chapter 13 MAY be a worthwhile tool for keeping it. But first here are some questions to ask your attorney:
1) Is the much longer time that a Chapter 13 case would take (3-to-5 years instead of about 4 months for Chapter 7) worth the benefit of keeping that (those) asset(s)?
2) Can those unprotected assets instead be protected better by some appropriate pre-bankruptcy planning?
3) Can those assets instead be protected in a Chapter 7 bankruptcy by paying a reasonable amount to the bankruptcy trustee in return for keeping the asset, and would the trustee allow that to be paid in reasonable monthly payments?
4) If you would pay money to the trustee in this way, who would receive that money? Might at least some of it be paid to where it would benefit you—such as to pay income taxes or some other debt that would not be written off in a Chapter 7 case and so you would have to pay anyway?
5) And lastly, would Chapter 13 help you in other ways beyond protecting your assets—enabling you to keep your home or vehicle(s), or to pay income taxes or some other debts you’d have to pay anyway—so that its accumulated benefits would make the extra time it takes worthwhile?