What Can I Keep After Bankruptcy?

One of the myths that circulates about bankruptcy is that you lose everything you own when you file bankruptcy. Not so! One of the basic ideas of debtor/creditors rights in this country is that, no matter how much they owe, debtors can retain certain property for basic living or a fresh start. This property is defined in exemptions. Exemptions are the property that neither a creditor with a judgment or a bankruptcy trustee can take from the debtor.

Exemptions are also the only issue where bankrutpcy rights are different state to state. Congress gave the states to substitute their state exemption statutues for the bankruptcy exemptions found in Section 522 of the Bankruptcy Code. Some states allow their residents to choose between the federal exemptions and the bankruptcy code exemptions.

The exemption amounts apply to the equity in the asset; if the house, for example, is worth $350,000, but it subject to a $300,000 mortgage, the exemption is applied to the $50,000 in equity. The value that is used is what the particular asset would sell for, today, in the open market, in its present condition.

In addition to the stated exemptions, debtors frequently get to keep more value than the statutory exemption because the cost to the trustee of taking possession of the asset, preparing it for sale, and paying the costs of selling it leave little or nothing for creditors.

Debtors who have assets with more value than can be protected by exemptions frequently elect to file Chapter 13, where they keep all of their assets, and pay their creditors over time what the creditors would have received in a Chapter 7 liquidation.