Bankruptcy FAQ: Will I lose my stuff?

One question I hear from clients is whether they will lose some treasured possession if they file for bankruptcy.  Leaving for another day the question of how to keep a house out of foreclosure or a car from being repossessed, I’ll only focus on this specific issue: if you file for bankruptcy, will someone from the government, or any of your creditors, be able to take and sell things you help satisfy your debts?

The answer, as one might expect, is “It depends.”

Are you filing Chapter 7 or Chapter 13? In a Chapter 7 bankruptcy, the Debtor’s (Debtor is what we call the person filing for bankruptcy) assets are at risk of being “liquidated,” meaning that the bankruptcy trustee (the individual overseeing the bankruptcy for the bankruptcy court) can take assets, sell them if necessary, and distribute the proceeds to the Creditors.  For an example of how this works, let’s say you own an RV, free and clear, which doesn’t qualify for an exemption (see below re: exemptions).  The trustee will arrange for the RV to be sold and then he or she will distribute the money received to your creditors. Picture the money the trustee receives from the RV sale as a pie.  Each creditor will get a slice of that pie. The trustee may get a slice too, so there is motivation for him or her to discover stuff that can be sold.

In a Chapter 13 case, the Debtor can keep his or her stuff, with certain limitations. Using the RV example above, in a Chapter 13 you make regular monthly payments through a payment plan to the trustee. The trustee takes the money and distributes it to the Creditors. Because the Creditors each get a slice of that pie, you get to keep the RV (assuming the RV is not security for a loan, a topic for another day). However, the only way this works is if the Creditors get at least as big a slice of pie through the Chapter 13 payment plan as they would if the RV had been sold in a Chapter 7.  If you have a non-exempt asset that you want to keep, and if you are able to file a Chapter 13, your payment plan will need to be large enough to give the Creditors enough pie. They’re hungry like that.

Any exemptions? The answer also depends on what exemptions are available.  If your stuff qualifies in full for an exemption, you may keep it.  What exemptions are available, and their value, vary depending on what state you are filing in. That’s why, if you are thinking about filing for bankruptcy in New York, it’s important to know what specific exemptions are available in New York and their limits.  For example, let’s say you are a mechanic, you file Chapter 7, and you own your own tools free and clear.  You use the tools daily for work, and if you didn’t have the tools your job would be in jeopardy.  New York currently provides $3000.00 exemption for “tools of trade.”  Let’s say your tools are collectively worth $2500.00.  You won’t need to worry about losing the tools because they fall within an exemption.  However, if your tools are worth $6,000.00 and the trustee sells the tools for that much, you may receive $3,000.00 of the sale proceeds to buy replacement tools with and the trustee will distribute whatever’s left over for administrative expenses and to your Creditors.  In many cases, the exemptions available are sufficient to cover most, if not all of the assets, and the bankruptcy trustee has nothing left to take.

To sum up, if you file a viable Chapter 13, or if you have enough exemptions to cover all your assets in a Chapter 7, (generally speaking and with some exceptions) you shouldn’t lose your stuff if you file for bankruptcy.