What Type of Bankruptcy Should I File If I Have Assets?

Bankruptcy is a tool to help individuals eliminate their debts and start over. In some cases an individual may be able to file Chapter 7 bankruptcy and eliminate their unsecured debt. If an individual is able to file Chapter 7 and get a discharge, they can start fresh and not have to worry about paying back their unsecured creditors. 

Chapter 7 bankruptcy isn’t right for everyone. Individuals with unprotected assets may need to file Chapter 13 to help them get out of a bad financial situation. Individuals considering bankruptcy need to be aware of what type of bankruptcy they can file before going through with the bankruptcy process. Individuals are often under a misconception that filing bankruptcy means they will be forced to give up their property, however, this is not true. 

Bankruptcy exemptions allow individuals to obtain debt relief through the bankruptcy process and keep their assets. Bankruptcy exemptions provide individuals a way to keep their property safe from creditors. Depending on which chapter an individual files they may or may not be able to keep their property.

If you are considering bankruptcy to help tackle your debt, your exemptions and assets will play a vital role in determining which type of bankruptcy you should file and what will happen to your property. This article will discuss what an asset is and why it matters when filing bankruptcy. 

What is an Asset and Why Do Assets Matter?

Simply put, an asset in a bankruptcy case is any property that an individual filing bankruptcy owns or has an interest in at the time they file their bankruptcy case. There are different types of property that are considered assets. Tangible items such as real estate, musical instruments, family heirlooms, and vehicles;  intangible items such as a right to money from a personal injury lawsuit or future death benefits from someone who died. When individuals file bankruptcy all of their personal and real property make up what is called the “bankruptcy estate.” In a Chapter 7 bankruptcy, the bankruptcy trustee assigned to the individual's case assumes control over the property in the bankruptcy estate. The trustee can sell any property that does not fall under a bankruptcy exemption.

What is an Exemption?

Bankruptcy exemptions are laws that determine what property a filer’s creditors and the bankruptcy trustee can take. Property that does not fall under an exemption can be sold to pay off creditors. If the individual’s property is exempt, the individual can keep their property. 

When Congress enacted the Bankruptcy Code, they allowed states to choose whether they wanted to allow filers to use the federal bankruptcy exemptions or state exemptions. Some states require individuals to use their state exemptions while other states allow them to use the federal bankruptcy exemptions. The amount of exemption available varies state by state. In some states the state exemptions may be more generous than the federal exemptions. Some states allow filers to choose between the state exemptions and federal exemptions. Individuals in these states must be extremely conscious of the differences when choosing. 

Most individuals who file bankruptcy are most concerned about what exemptions are available to cover their property. The homestead exemption and the wildcard allow individuals to file bankruptcy and keep their property, as long as the equity in the property is exempt. The homestead exemption specifically, protects a certain amount of equity in a filer’s primary residence.

For example, if an individual has a home with $50,0000 of equity their homestead exemption must be enough to cover the $50,0000. If the homestead exemption only covers $25,000 and not the full $50,000 the bankruptcy trustee will sell the non-exempt property and use the non-exempt portion to pay the individual’s creditors. 

A wildcard exemption not only protects real property but can also be used to protect other assets such as household goods and furnishings, tools, automobiles, bank accounts, art, family heirlooms, cash, and retirement accounts (pre-tax). The wildcard exemption allows individuals to protect property that is not covered by another bankruptcy exemption. Individuals that have a personal injury claim may be able to use this exemption as well to keep some of the money. Personal injury exemptions can be complicated and it may be wise to consult a bankruptcy attorney before filing if a filer is expecting proceeds from a personal injury case. 

Fortunately, most people who file bankruptcy can exempt most, if not all of their property when they file bankruptcy. 

What Type of Bankruptcy Should I File Based on Assets and Exemptions?

Individuals considering bankruptcy will need to review their assets and determine what available exemptions they have, to decide which chapter of bankruptcy they should file. Individuals who have assets that are non-exempt and file the wrong chapter of bankruptcy run the risk of having the bankruptcy trustee take their property and sell it to pay back creditors. Chapter 7 and Chapter 13 work differently when it comes to whether or not a trustee will take an asset. 

In Chapter 7 bankruptcy, any property that is not exempt will be taken by the trustee and sold to pay off creditors. Individuals should only consider filing Chapter 7 bankruptcy if all of their property can be exempt. The individual may still be able to file a Chapter 7 bankruptcy if they have non-exempt property as long as they permit the bankruptcy trustee to sell some of their personal property. 

Ensuring an individual’s property is exempt however, is not the only hurdle they must overcome before filing for Chapter 7. Not everyone can file under Chapter 7. Individuals must qualify to file a Chapter 7 bankruptcy. To qualify, individuals must pass a means test, which takes into account an individual’s monthly income and compares it to their state’s household median income. Individuals below their state’s household median income automatically qualify for a Chapter 7 bankruptcy. Individuals who don’t qualify will have to go to the second part of the test to see if they qualify. If they still don’t qualify, they may need to file a Chapter 13 bankruptcy instead. 

In a Chapter 13 bankruptcy, individuals have a chance to keep their nonexempt property as long as they can pay back the unexempt portion of their property through a Chapter 13 repayment plan. For example, if the filer has a house worth $100,000 with a mortgage of $50,000 and they use the federal homestead exemption available ($27,900) to protect the equity in their house, the individual will have $22,100 of unexempt equity.

In this case, the individual will need to propose a repayment plan to pay unsecured creditors  $22,100 (the non-exempt portion) over their three- or five-year repayment plan. In a Chapter 13 bankruptcy, the individual proposes a monthly repayment plan to pay back their debt over a 3-5-year plan. If the plan is approved the payments are made to the bankruptcy trustee who then distributes the money to their creditors. 

Chapter 13 can provide many advantages for individuals who are behind on their mortgage payments. A Chapter 13 bankruptcy allows individuals time to pay back their arrears. For many people it can help them bring current their:

• mortgages on real estate, 

• car loans, and

• child support payments. 

Chapter 13 bankruptcy is a complicated area of law. Individuals will need to attend a few hearings at the Bankruptcy Court before a plan may be confirmed. It is recommended that individuals that may need to file a Chapter 13 bankruptcy speak with a bankruptcy attorney to help them navigate the complex process. 

Most people who file bankruptcy have little to no property and don’t have to worry about a trustee taking their property. If you do have property that is not exempt it may be wise to get in touch with a bankruptcy lawyer that can help you navigate which chapter of bankruptcy is best for you to help you get your fresh start. Most bankruptcy law firms provide free consultations that can help you understand how the bankruptcy process will impact your assets.