Setting up a bankruptcy claim the right way can help you keep your car, home, and belongings.
Bankruptcy. For most people, the word invokes a terrible scene of punishment for having financial challenges, but let’s look at this in a different way. Bankruptcy is a tool available to the public that can help them overcome their overwhelming debt. It can provide much-needed relief and the ability to start fresh financially. Here are some of the most common questions we receive when working with clients who are considering bankruptcy and are concerned about keeping their belongings.
If I file bankruptcy, what can I keep?
In short; it depends. There is more than one type of bankruptcy, and they are all structured slightly differently. We always recommend calling a lawyer you trustfor advice before going ahead with any proceedings or paperwork. First, let’s look deeper into the two relief options that you are most likely to be looking at for personal financial assistance:
Chapter 7 Bankruptcy May Require You to Sell Items
Chapter 7 is also known as liquidation bankruptcy and works by essentially selling items you own that have a dollar value to repay some or all of the amount owing, after which the remaining debt will most likely be discharged, meaning you will no longer be responsible for it.
In short, if you file Chapter 7 bankruptcy, a specialist called a bankruptcy trustee will take any non-exempt property of value and sell it to pay back the creditors you owe money to. This is a good option for someone with a lower income; however, there are some important aspects to consider when thinking about filing for a Chapter 7 bankruptcy.
Type of Debt – While most debts can be released through this type of resolution, there are up to 19 categories of debt that may not be eligible for discharge, so it is important to seek guidance when looking at filing bankruptcy. It is also important to ensure all debts are claimed during filing, as unclaimed debts will not be forgiven!
Value of Assets – Assets are simply the items you own that are worth money. They will be reviewed by a qualified bankruptcy trustee, and compared with your overall financial state and total amount of debt. Depending on the value of – and equity in – the owned assets, some or all may be forfeit as repayment, or you may get to keep them. The key here is to find items that will pay off the most debt while leaving you in the best living scenario possible, as long as your items are above exemption limits.
Exemptions – Exemptions are state and federal outlines that determine what you can keep during a Chapter 7 bankruptcy. An exemption can apply to any and all personal property and belongings that fit the criteria. Typically, this will be the dollar value of the item. If an item is assessed below the exemption amount, you get to keep it! We’ll go into more detail about what that looks like later on.
You Can Keep Everything If You Are Eligible for Chapter 13 Bankruptcy
Commonly called debt restructuring, a Chapter 13 bankruptcy is the second most common type. It is often used by those with a steady income or with a higher net worth who would like to preserve their assets, such as a car or a home. Debt reorganization is focused on restructuring and consolidating debts. You will be required to follow a strict repayment plan to eliminate the debt in a set time frame, using a portion of your regular income. This type of insolvency solution does not require you to give up your belongings, but there are additional requirements to file for this option, such as:
Secured Debt – There is a cap for secured debt of $1,257,850. These debt limits change periodically. Secured debt is made up of amounts owing where an asset was used as collateral to obtain funds (you told the bank you had a car worth x amount to borrow money), or where the property or belongings with money owing on them have resale or residual value (jewelry or electronics) or have a down payment that was given as security (a mortgage or a car). In simpler terms, this means that if the debt required a list of assets to obtain, or if it is for the purchase of an asset, it would likely be considered a secure debt.
Unsecured Debt – For unsecured debt, the limit is $419,275. The term unsecured debt refers to amounts owing that do not pertain directly to or did not require an asset to accumulate. Credit card and medical debt are common examples of this. The cap for this is much lower because there is a higher risk involved with debt where there is no item of value that can help recoup the cost should someone be unable to complete their restructuring plan.
Another mandatory step to filing both a Chapter 7 and a Chapter 13 bankruptcy is that you must be willing to go through credit counseling. Credit counseling is an excellent idea for anyone thinking of any type of financial support or bankruptcy proceeding. Positive money management can reduce your personal risk as well as help you repay debts more efficiently.
If I file a Chapter 7 bankruptcy, what can I keep?
There are several levels to this answer, so let’s break it down further. Obviously, when filing a Chapter 7 bankruptcy, the question at the forefront is finding out exactly what can be kept.
Luckily, the laws are set up in a way that helps protect as many of your personal belongings as possible while still taking care of your outstanding debt. This also means that even a lower-income household will not be left without the things they need to keep a roof over their heads and hold a paying job. Furthermore, many accounts that pertain to providing for a future or children are also safe.
What you keep also depends on where you live and the exemption guidelines for your state. Exemptions are what categorize the property and belongings you will keep during the liquidation process. Let’s dig in deeper to some of the terminology with regard to keeping your home, car, and other personal effects.
Bankruptcy Exemptions Are What You Can Keep!
First, you’ll have to decide whether to use state or federal exemptions. Your legal team will advise you as to which one will meet your needs best. One benefit of using state guidelines is that there may be a federal non-exemptions list that also applies depending on where you live.
Now you’ll need to list all your debts, belongings and assets, and exemptions. This part of the process is very detail-oriented and paperwork-heavy. Your attorney will be able to help you go through and make sure nothing is missed.
Here are some exemptions and amounts you may consider claiming in Washington:
$3,250 per spouse, per vehicle
Personal Items (including household and yard)
$6,500 per spouse
Health & Medical Savings
75% of disposable income, or 30 times minimum wage (whichever is greater)
All tax-exempt retirement accounts and some government employee pensions
Tools of Trade
Alimony or Child Support
There is also a type of exemption available in some states, including Washington, called a wildcard exemption. This can be used to cover up to $3,000 of your belongings, including a certain amount of cash. The unique thing about the wildcard exemption is that it may be able to be added to a vehicle exemption, essentially doubling the amount!
Many of the items on the federal non-exempt list apply to specific or government employees, including military. It is important to note that each state has slightly different exemption limits, and if you’ve lived in more than one state in the past two years, there may be some additional factors to consider for eligibility and exemptions.
What is the Difference Between Cost and Equity?
This is an important distinction, as the equity you hold can be the deciding factor between whether or not you can keep a home or a car when filing bankruptcy. Equity is the amount the property is worth; minus the amount you owe.
If you have a $200,000 home that you paid $10,000 down on and have paid off $12,000 of the mortgage principle, your equity in the home is $22,000.
If you are in Washington, you would be under the home equity exemption amount, which means you could likely keep your home, because if your home were to be repossessed and sold, the remainder of the mortgage, plus the fees required to sell it would likely take up most of the amount, leaving minimal cash to pay down debts unless the home is the primary debt causing the issue.
Discharging a Debt Means it Disappears
Now that your lists and exemptions are complete, the items not exempt will be sold to repay as much debt as possible. The majority of debt that cannot be repaid will be discharged at the end of the process, which means it will be forgiven as if it never existed, and you will no longer owe that money. There is an order of operations to debt discharge, and not all debts are eligible, which means that depending on the scenario, there could be some obligations left over that you will need to pay back.
Typically, any debts considered priority will be paid first, followed by unsecured creditors, unless the proceeds are from an item where you hold secured debt (like a car loan or mortgage), in which case the company you owe the secured debt to has first right to claim their funds.
Some examples of debts that cannot be discharged are:
Child support or alimony
Income tax (some)
Property damage repayments (some)
DUI damage repayments (some)
Student loans (most)
Property Liens (if you keep the item)
Creditors also have the option to apply to make the debt you hold with them non-dischargeable. The court will decide whether or not to release debts with objections. If it is not released, additional liquidation may be required, or it may be added to the debt repayment plan with other non-dischargeable debts after the proceedings.
How Do I Know if There Is a Lien On My House or Car?
A lien sometimes has negative connotations, but it is more common than you might think. For example, a mortgage is a lien. The mortgage company agrees to give you money to buy a house with the expectation that you will pay them back. The mortgage company registers a type of lien on the title of the home so that if you do not pay them, they can take back the property to sell and get their money back.
A lien is a lender adding a note of priority obligation (first dibs) onto an item that you own. This means that they get their money repaid before you do when it is sold if you haven’t paid it back before that happens. It also allows them to take steps to repossess the item if you do not fulfill the payment obligation. In another example, the IRS could take out a lien on your property if you haven’t paid taxes.
If you file for bankruptcy, the lien holder will receive repayment when that property is sold. If you keep the item, that lien stays with it until the creditor receives their money from you. This can make a difference in whether the bankruptcy determines that an item can be kept or must be liquidated.
A lien is different from a personal obligation, like a credit card, which relies on your promise to repay, with no requirement of a collateral item that can be taken if you don’t. Not just any company can add a lien onto your belongings, with credit cards being one example of this.
Can I Keep a Debt So I Can Keep My Property?
If you have a secured debt against an item, such as a home or a car, but you exceed the exemption amount, there are options to keep it. Those are redemption, reaffirmation, or ride through. Essentially, reaffirmation just means that you agree to continue (or reaffirm your commitment to) paying for and retaining ownership of the property. Typically, this will be a high dollar item like a home or a car that the lender can register a lien against, or repossess should you not be able to continue payments at any point.
You may be able to renegotiate payment terms with the lender at the point, including paying off the current value of the item instead of the initial amount left owing. Many companies are willing to do this to avoid the repossession and resale process.
Reaffirmed debts do need to be filed and approved by the courts. This means that you will need to ensure your new financial situation can support taking on new debt, that the terms of the agreement are reasonable, and the debt isn’t worth more than the item itself.
Do You Need a Lawyer to File Bankruptcy?
Bankruptcy is a complex matter, and it is a brave step to reclaim your life and give yourself and your family a new outlook on the future. While you can file your own bankruptcy claim, it is generally recommended to hire a lawyer to make sure each step is completed correctly and you are set up for success in the future!
We at Curtis, Casteel and Palmer are here to be your trusted guide throughout the process and help you feel educated, supported, and positive about your outcomes so that you can look forward to what’s next.