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How Do I Keep My Property in a Bankruptcy?

Understand your state’s bankruptcy exemption rules

“Bankruptcy is a legal mechanism to address your debts,” says Alabama bankruptcy attorney Ronald Sykstus.  

One major concern individuals have when filing bankruptcy is whether they will lose all their property.  

Bankruptcy is “a generous law,” says Sykstus, intended to give individuals a fresh start. But to regain their financial footing, individuals need to keep essentials like clothing, a working car, and a place to live.  

This is where bankruptcy exemptions come in. 

“Exemptions are, in a nutshell, what you can keep,” says Sykstus. “Each state either has its own set of exemptions or follows the federal exemption scheme.” 

In other words, bankruptcy exemptions help protect your property when you file bankruptcy.  

This article will give an introduction to exemptions. If you are considering bankruptcy, speak with a bankruptcy attorney about your options. 

What Is Bankruptcy? 

The U.S. Bankruptcy Code provides a process for legally resolving debt in bankruptcy court. There are many types of debt, including: 

  • Credit card debt 
  • Car loans 
  • Mortgages 
  • Medical debt 
  • Unpaid utility bills 

When researching bankruptcy, you may hear the terms “secured debt” and “unsecured debt.”  

  • Secured debts are tied to a particular asset. The asset “secures” or backs up the debt. If you can’t pay back what you borrowed to purchase the property, the property may be taken instead. For example, a house secures a mortgage. If you default on your mortgage payments, the lender can foreclose on your home, meaning they go through a legal process to repossess it. The mortgage lender is called a “secured creditor” because they are a lender for a secured asset. 
  • Unsecured debts are not tied to a particular asset. Credit card debt is an excellent example of this kind of debt. If you default on credit card debt, there isn’t a specific piece of property the unsecured creditor can take back.  

There are several chapters to the bankruptcy code. Each chapter is a different type of bankruptcy designed to handle debt differently. 

Chapter 7 and chapter 13 are the most common types of bankruptcy for individuals: 

  • Chapter 7 bankruptcy. Often called “liquidation bankruptcy,” chapter 7 resolves debt by selling assets in the bankruptcy estate and using the proceeds to pay off debts.  
  • Chapter 13 bankruptcy. Chapter 13 is a type of debt reorganization bankruptcy. Instead of selling assets to pay off debts, chapter 13 establishes a repayment plan based on your income and expenses to pay off debt. Payment plans are typically in monthly payments over the course of 3-5 years. 

It’s important to realize that bankruptcy won’t get rid of some types of debt, including: 

  • Student loans  
  • Alimony 
  • Child support 

In other words, these financial obligations remain even if you file for bankruptcy. 

When Should I File for Bankruptcy? 

When considering bankruptcy, “don’t do it haphazardly… start slow,” says Sykstus.   

When you meet with a bankruptcy lawyer, you will “talk through your situation… [a lawyer will] want to know your entire financial situation and see if [filing bankruptcy] makes sense,” he says.  

“For example, if you have $1,000 in debt and one debt collector, does it make sense to file bankruptcy? In the main, no. On the other hand, let’s say you have no property, no real estate, no car, and all you’ve got is maybe $40,000 of uninsured medical debt and maybe some credit card debt—does that make sense? Maybe.” 

Sykstus recommends “[Talking] to a lawyer that is not trying to push you one way or the other. Just try to know your options of what you can and cannot do. From there, you can make some positive steps if you are going to file bankruptcy.” 

It’s essential to understand that “bankruptcy law is predicated on honesty, openness, and truthfulness… the law is generous, but it’s not generous if there are misstatements or omissions. You want to be above board to take advantage of the generous law,” says Sykstus.  

How Do You Keep Your Assets in Bankruptcy? 

“People often ask about assets such as their nice watch or family heirloom, and whether they can just give it to a friend or child and not list it” for bankruptcy purposes, says Sykstus.   

“Obviously, that flies in the face of what bankruptcy law is about. You have to list all your assets,” he says.  

“Lying comes with severe penalties, including criminal penalties. Nothing is worth that.” 

The way to legally keep assets in bankruptcy is through exemptions.   

There are federal bankruptcy exemptions as well as state exemption laws. Exemption amounts vary between federal and state laws as well as between states. 

“As a general rule, the federal exemption scheme is probably a little more generous,” says Sykstus. 

In general, exemptions may allow you to keep the following: 

  • Your house  
  • Household goods 
  • Clothing 
  • Your motor vehicle 
  • Retirement accounts 

When it comes to personal property, which is “anything else you own [besides your house] for example, cash in the bank, cars that are paid for, furniture—in Alabama, the exemption amount is about $7,500 per person,” says Sykstus.  

So, you can keep anything you own up to the $7,500 threshold in Alabama. Anything over that threshold is “nonexempt property.” 

The exemption amount for personal property will be different depending on the state you live in. Because of variance by state, it’s important to speak with a bankruptcy attorney in your area who understands your state’s rules.  

An attorney can help you strategize about keeping as much of your property as possible under the law. 

What Happens to My Home if I File Bankruptcy? 

A significant bankruptcy exemption is the homestead exemption, which applies to houses. Like other exemptions, the amount varies from state to state.  

“Some states have more generous exemption amounts than others,” says Sykstus.  

In general, if your state’s homestead exemption exceeds the amount of equity you have in your house, your house is safe.  

“In Alabama, for instance, the homestead exemption is about $16,000 per individual. So, let’s say a husband and wife own a house that’s worth $100,000. They only owe $75,000 on it, so they have $25,000 in equity in their house,” says Sykstus.  

The law allows spouses to combine their exemption amounts. So, “adding the two together, the couple has a $32,000 exemption.” This exceeds the amount of home equity they have, “so they would keep the house,” he says.  

However, “if it were a $400,000 house that’s paid for, they couldn’t file chapter 7 to get rid of their other debts because they would lose their house,” since the equity they have far exceeds the exemption amount. 

Other states, such as Texas and Florida, “have a 100 percent homestead exemption,” meaning that you can keep your house regardless of the amount of equity in it. 

“Even though bankruptcy law is universal” under the federal code, “there’s a bit of different flavor locally speaking in each jurisdiction” regarding exemptions and rules, says Sykstus.  

Questions for a Bankruptcy Attorney 

If you’re considering bankruptcy or other debt relief options and are worried about losing property, it’s wise to get legal advice from a bankruptcy attorney as soon as you can.  

Fortunately, many attorneys provide free consultations, allowing the attorney to hear the facts of your case and for you to determine if the attorney meets your needs. 

To see whether an attorney or law firm is a good fit, ask informed questions such as: 

  • What are your attorneys’ fees and billing options? 
  • What is required to file a bankruptcy petition? 
  • How is a bankruptcy trustee appointed? 
  • What are the steps in the bankruptcy process? 
  • What type of bankruptcy do I qualify for? 
  • What types of property are exempt in my state? 
  • What is the exemption amount in my state? 

Look for a bankruptcy lawyer in the Super Lawyers directory for help with your bankruptcy questions.

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