Unprotected Assets

Everyone’s fear with filing bankruptcy: I will lose my house/car/retirement/bank accounts. (Second only to: I will lose my pride.) There are two lists of what one can protect. The protections are called “exemptions,” and the two lists are the federal exemptions and your home state’s own exemptions (but sometimes its your previous home state; that’s covered in other posts).

Some states only permit their own state exemption and prohibit the federal exemption. Congress allowed states to do this as part of the 1978 Bankruptcy Code to show respect for state’s rights. In some areas the states are more generous than the federal exemptions, and in other areas the states are more stingy.

So you file your Chapter 7 case and the trustee believes your asset is worth more than you think, so much more that a large part might be unprotected (allowing the trustee to sell the asset and give you only your protected portion). You can (1) negotiate with the trustee, depending on your reserves and the generosity of friends and family, (2) surrender the asset (perhaps you don’t need the expense of a second car; it may be preventing you from saving up for a down payment for a home), or (3) convert to Chapter 13 and pay the unprotected value over the length of your plan thereby keeping the asset.

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