debt

What can creditors take in a bankruptcy?

Justin HarelikDear Bankruptcy Adviser,
I am on very limited income: unemployment and early Social Security. If I file Chapter 7 bankruptcy, can my creditors such as banks (for my credit cards) take my personal belongings such as jewelry, clothes or furniture? Should I do something with these items before I file? And will Chapter 7 put off my home foreclosure?
-- Chuck

Young man looking at paper in panic © Andrey_Popov/Shutterstock.com

Dear Chuck,
I am pretty confident that the creditors do not want your clothes or furniture. And unless you happen to own some very valuable jewelry, those items are likely safe as well.

Your question is tough to specifically answer only because every state has different and distinct bankruptcy laws. However, there are some major things that you should know before filing bankruptcy. The person assigned to your case, called a trustee, will have particular interest in the following issues -- of course, there are others, but these are some of the big issues to cover.

Transfer of assets

Do not transfer items out of your name with the hopes of protecting them. You risk the property more when you take it out of your name. For example, in most cases, I can easily protect a car that is paid in full when the vehicle is still registered in my client's name. However, if my client transferred the vehicle to a friend, family member or even complete stranger before filing bankruptcy, I might not be able to protect that car anymore.

The court and state legislatures do not want people with a bunch of assets taking those assets out of their name simply to get rid of the bad debt and keep the valuable asset. That is not reasonable. If you live in a state that does not allow you to protect many items, you must legally, reasonably and responsibly prepare for a bankruptcy filing. There are legal ways to protect assets, but transferring them out of your name on the eve of filing bankruptcy is not one of them.

Cash advances

The creditor will examine your account after you file. Large cash advances could be regarded as fraudulent activity and could mean you would have to pay back some or all of that debt after your case has been filed. Usually you don't pay back the entire balance, just some, or all, of the cash advance you took before filing.

Payments to family

Mom and your favorite uncle Charlie are considered creditors. However, just because you feel it is important to pay them does not mean the court considers their debt to be any different from that of any other creditor.

Pending or current lawsuits

You might be suing someone or intend to sue. You will need to disclose any current or pending litigation you are involved in, even workers' compensation cases. Lawsuits are considered assets and must be disclosed. The trustee may or may not have interest in the lawsuit, but you must give the trustee the first opportunity to evaluate any litigation you are involved in or may be considering.

Disclose any potential inheritance

This is a very difficult issue to discuss in a short column, so I will keep this very simple. You need to make sure to disclose whether you have your name on a trust or whether you are about to get an inheritance. There are specific time limits associated with this information. If you have the potential of receiving money from a family member or friend, you must consult an attorney.

Filing bankruptcy before a foreclosure

Finally, you ask about filing bankruptcy to delay a foreclosure. There are a few exceptions, but if you have other debt, a second mortgage you will be liable for or credit card debt, it is legal to file bankruptcy right before the foreclosure sale of your property.

Each state is different, but filing right before a foreclosure does buy you a little more time. How much is difficult to say.

You will need to be aware of the issues I have detailed above. You don't want to compound the bankruptcy filing to stop a sale with the loss of valuable assets.

Ask the adviser

To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "Bankruptcy" as the topic. Read more Bankruptcy Adviser columns and more stories about debt management.

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