What can creditors take in a bankruptcy?
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Bankruptcy is often a last resort because it comes with risks and downsides. To help minimize the risks, laws are in place to protect you while also providing creditors with a portion of debt repayment.
When you file for bankruptcy, you don’t have to give up everything you own. Bankruptcy is a process designed to help people and businesses get a fresh start. Nevertheless, all assets will be measured and evaluated and may be used to repay part of the outstanding debt.
What creditors can take in a bankruptcy
All nonexempt assets may be used to repay your creditors in a Chapter 7 bankruptcy. These include:
- Investment properties
- Savings accounts
- Any other items of value, like artwork or jewelry
You can keep a certain value amount of these because of federal and state bankruptcy exemptions.
What you keep when filing for bankruptcy
Laws were created to help protect your property during bankruptcy, called bankruptcy exemptions; however, exemptions vary depending on the process and the state.
Common federal bankruptcy exemptions are listed below. Married couples filing jointly can double the exemption amount, and all amounts are shown for cases filed after April 1, 2022. These numbers will be adjusted again on March 31, 2025.
Your primary residence could be exempt when filing for bankruptcy if its equity is below the exemption limit. You can protect $27,900 of equity in your home under federal exemptions.
The homestead exemption can apply to your primary residence, which may qualify as:
- A house or another dwelling
- Personal property used as a residence
Because your vehicle is an asset, creditors may pursue it when you file for bankruptcy. However, your vehicle may be counted as an exemption depending on the type of bankruptcy filed, whether you own, lease or are financing the vehicle and its value. According to federal bankruptcy exemption law, you may be able to exempt part of your vehicle’s equity up to $4,450.
If your equity exceeds the limit, several things may happen:
- The trustee can sell your vehicle, give you the exempted amount and use the remainder to pay creditors
- The lender can repossess the car if you’re behind on your payments
- You can surrender the vehicle, which relieves you of the responsibility from the auto loan after bankruptcy
Personal items and household goods exemptions
Besides real estate and your vehicle, personal property may qualify for bankruptcy exemption. Here are some commonly claimed federal personal property exemptions:
- $1,870 for jewelry
- $2,800 for tools of the trade
- $14,875 in aggregate ($700 for each item) for household goods and furnishings, appliances, clothing, animals, books, crops or musical instruments
- $13,400 in accrued interest, dividend or loan value of a life insurance contract
- Professionally prescribed health aids
Wages, benefits and retirement account exemptions
There are exemptions to protect the money you receive as a benefit, support or what you have in retirement savings, including:
- Alimony, support, or maintenance that you reasonably need for your support
- Life insurance payments that you need for support
- All Social Security benefits, unemployment benefits, veteran’s benefits, public assistance and disability or illness benefits
- Under most circumstances, you can keep proceeds from your retirement accounts up to the maximum aggregate value of $1,512,350
Injury recovery exemptions
Exemptions for personal injury recovery include:
- $27,900 for personal injury recovery, not including pain and suffering or pecuniary loss
- Compensation for loss of future earnings necessary for support
- Payment for the wrongful death of a person you depended on for support
- Compensation due to being a victim of a crime
The wildcard exemption can be used for any type of property. The exemption is $1,475 plus $13,950 of any unused portion of your property exemption.
Federal vs. state exemptions
Some states have their own exemption rules that differ from federal exemptions. In a few states, you can choose whether to use the state or the federal bankruptcy exemptions:
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- Rhode Island
You will follow federal regulations if your state does not have its own laws.
Differences between Chapter 7 and Chapter 13 bankruptcy
The most common options for bankruptcy are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Each has its benefits and drawbacks, and the type of bankruptcy affects what assets are kept or taken from you.
Chapter 7 bankruptcy enables you to legally discharge, or no longer be liable for, most of the debt you owed on the date you filed. Only certain debts are eligible to be discharged, and you must pass a means test to qualify.
You could lose some of your nonexempt property by taking this route — specifically any properties that aren’t your primary residence. The transfer may be reversed if you had transferred property before filing for bankruptcy. Your debts will be completely forgiven, making Chapter 7 the most accessible option if you cannot afford a payment plan.
Chapter 13 bankruptcy enables you to enter into a payment plan to pay off your debt over three to five years. In 2021, the plan period was extended to seven years after President Biden signed the Bankruptcy Relief Extension Act into law. The Chapter 13 process protects your property and prevents wage garnishment. Unlike Chapter 7, your debt won’t be forgiven. Instead, you pay back your outstanding debt through a monthly payment plan determined by your disposable income.
What to know before filing for bankruptcy
As a fallout of your bankruptcy filing, your credit will be tarnished for a 10-year period if it is a Chapter 7 bankruptcy, and a seven-year period for a Chapter 13 bankruptcy.
Even though you are not legally required to hire a lawyer to handle your bankruptcy, it may be in your best interest to do so. You may even be able to find free legal services.