Declaring Bankruptcy: Will You Lose Everything?

If you file for bankruptcy, you won't be able to keep all your assets, but some major ones will be protected. Vitalii Vodolazskyi/Shutterstock

The number of individuals filing for bankruptcy increased 16.8 percent in 2023. And many of those who filed for bankruptcy may have feared that they would lose everything.

But do you really lose everything when filing for bankruptcy? There are some limitations as to what a creditor can take. You may not keep all your assets, but some major ones are protected.

Chapter 13 Versus Chapter 7

If you’re declaring bankruptcy, it’s important to know the differences between Chapter 13 and Chapter 7. The differences will affect both your long-term finances and assets.

Chapter 13 is known as reorganization bankruptcy. Under Chapter 13, you’ll enter into a three-to-five-year legal payment plan, based on your disposable income. If the court approves the repayment plan, you will be under the court’s protection while repaying the debts. With this plan, you are not forced to liquidate assets as you would be under Chapter 7.

The liquidation chapter, or Chapter 7, is used when individuals, corporations, and partnerships cannot repair their finances. In other words, they allow their non-exempt assets to be sold for cash to repay creditors. If the assets don’t fully repay the debt, the remaining debt is legally dismissed.

Under Chapter 7 bankruptcy, what assets must be liquidated?

Types of Assets

There are three types of assets that a court-appointed trustee will review. These include tangible, intangible, and real property.

Intangible property includes non-physical assets such as child support, retirement savings, and alimony. These are different from tangible assets, which entail physical belongings and valuables.

Tangible assets may include vehicles, jewelry, clothing, artwork, or collections.

The third type of asset a trustee will look at is real property, such as land and buildings.

What Creditors Can Take Under Chapter 7

Non-exempt assets are those that are not protected in bankruptcy: they can be sold by the trustee to pay off creditors.

Non-exempt assets include vehicles, artwork, collections, jewelry, family heirlooms and other miscellaneous items.

They may also include a second home or vacation home, land and investment properties, and savings and investment accounts.

Because assets are subject to federal and state bankruptcy exemptions, there are restrictions and limits on the specific assets that creditors may claim.

Homestead Exemption and Non-Exemption

Although federal exemptions change periodically, the following federal government exemptions and non-exemptions apply to cases filed between April 2022 to March 31, 2025.

Although your primary residence is not totally protected by the federal government when you file Chapter 7 bankruptcy, a certain amount of your home’s equity is protected from creditors.  This is referred to as the homestead exemption.

The federal homestead exemption is $27,900. So, if you have less than $27,900 of equity in your home, your primary residence is exempt from creditors under federal law. For married couples filing jointly, the amount is $55,800.

Some states will offer additional protection. But if they don’t, and you have more equity than the federal government allows, your bankruptcy trustee will determine if it makes financial sense to liquidate the property.

This will usually depend on market conditions and fees associated with the sale. But, your house could be sold to repay creditors.

If there is any equity left after the creditors have been paid, you will receive that money back.

Limited Vehicle Exemption

Although vehicles aren’t exempt, the federal government allows $4,450 of the equity in a primary vehicle to be exempt. Several scenarios could happen if your equity exceeds the limits, and state laws don’t cover the difference.

One result could be that the trustee sells your vehicle and gives you the exempted amount back. The rest will go to your creditors. If you’re behind on your payments, the lender could repossess the vehicle.

Or, you can return the vehicle to the lender. You’ll be relieved of the debt for the loan through the bankruptcy.

State Bankruptcy Exemptions

California is an example of a state with restrictions or differences from the federal government in non-exempted assets. The state restricts exemptions for debtors and allows them to keep certain property and assets under Chapter 7.

For example, California protects the equity in your home and car. The state allows you to keep jewelry up to a certain dollar amount. There are other miscellaneous items California lets you keep that other states do not.

Florida allows debtors to claim up to $4,000 of personal property if they don’t use the homestead exemption. This works well for those people who rent but want to keep some of their assets.

However, you must live in Florida for 730 days before filing a bankruptcy petition if you want to take advantage of the state’s exemptions. Otherwise, you must follow the bankruptcy laws of your previous state.

States have various nuances to their bankruptcy laws. It’s wise to consult with an attorney licensed in your state when filing for bankruptcy, so you will know what your state’s rules and regulations are.

Understand Your Non-Exemptions

The most crucial non-exemption is the federal government’s restriction on selling a home to meet a creditor’s claims. It’s important to realize that your home isn’t completely non-exempt from creditors and that only a certain part of your home equity is protected or exempt .

Make sure to meet with an attorney in your state so you’ll know if the homestead exemption applies to you and if your state regulations offer you further protection.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the author. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.