Do I Really Need To Give Up My Possessions During Bankruptcy?

There are many misperceptions about bankruptcy that people worry about. To put your mind at ease, I like to explain to my clients how the process works.

When you file for bankruptcy, a “bankruptcy estate” is created. That means that in a broad sense you don’t potentially own anything anymore. Instead, your bankruptcy estate owns everything that you owned. However, in reality it works a bit differently. There are a series of state law exemptions that we use when we file a bankruptcy. If we exempt something from the bankruptcy estate, it means that it doesn’t become part of the bankruptcy and you get to keep it.

If we exempt everything that you own, it means that you are a “no-asset” bankruptcy and you get to keep everything. Now the law differs by state, and each state has its own exemption scheme. I really advise talking to a lawyer to find out if your assets are fully exemptible in your state. Sometimes an asset can be partially exemptible and that may influence your decision on whether to file Chapter 7 bankruptcy where they would sell your stuff to pay your creditors. Or Chapter 13 where you can keep your stuff but you have to pay your creditors back over time. The amount you pay back in this case would be equal to how much your stuff could have been sold for at the time.

So if you have possessions that might not be exempt, you might want to do a Chapter 13 and repay those creditors over time. If you can’t afford that, you might be stuck filing a Chapter 7 and you just take the hit of non-exempt assets that are then liquidated or sold for the benefit of creditors.

But these decisions are not easy. They’re complicated, which is why you should meet with a qualified bankruptcy attorney who can determine what those exemptions are and plan for them.