What Can I Keep In a Bankruptcy?

One of the first questions I’m usually asked by a potential client in financial trouble is, “I can’t file for bankruptcy—if I do, I’ll lose everything!”

Not true. Not even close to true. In fact, in the vast majority of cases, people keep everything they own—their home, their cars, their furniture, their retirement, and even the money in their bank account.

In Chapter 7 cases, you are allowed to keep two types of assets. The first is an asset that has no net monetary value. This means that if the Chapter 7 Trustee were to sell it, the costs of sale, plus the trustee’s commissions, would be higher than the amount of money the sale would bring in. For example, your clothes probably aren’t really worth anything if sold. Ditto most of your household goods and furnishings. The car you bought two years ago and owe more on it than it’s worth? No equity, so you keep it. If your house is worth within about 10% of the amount of your mortgage, there probably isn’t any equity, and you’ll be able to keep it.

For most people, this covers most of what they own. And for the rest, there are exemptions. Exemptions are a list of things that the law lets you keep. But here’s where it gets tricky. Some states use the federal exemptions, which are contained in the bankruptcy code. Other states, such as Maryland, require you to use their state exemptions, which often differ significantly from the federal exemptions. Some are better and some are worse. Other states let you pick: you can use either the federal or the state exemptions, whichever are better for you. And some federal rules exempt certain types of assets no matter which state you live in: your 401(k) or IRA, for example, is almost always exempt.

Because of these different rules, people in identical situations living in different states can end up with very different results.

For example, if you live in Florida and have $100,000 in equity in your house, you’re fine: Florida’s homestead exemptions let you exempt that equity, so you can keep your house. In some other states, there is no homestead exemption. If you’re the sole owner of a house with $100,000 in equity here in Maryland, the Trustee would want to sell it to distribute the equity to your creditors. But if this situation occurs, you’ll probably want to file a Chapter 13 anyway, so that you could keep your house.

In a Chapter 13, you keep everything, exempt or not. But you have to pay your general unsecured creditors, over time, at least what they would receive were your case a Chapter 7. This is what we call the “Chapter 7 Liquidation Analysis.” So, if you have non-exempt equity in your house of $12,000, you’d have to pay your general unsecured creditors that same $12,000 over five years in a Chapter 13 Plan, at $200 per month.

Exemptions can be confusing, but are vitally important. Before you file, you need to go over what exemptions are available to you with your attorney, and learn what impact they will have on your case.