Protecting Assets in Bankruptcy

bankruptcy assets exemption

One of the most common myths about bankruptcy is that you will lose everything you own if you file.  In fact, most people do not lose anything.

Here is how assets work in bankruptcy: the moment you file a petition for relief, a legal fiction takes place.  All the property you own on the date of filing becomes a part of the “bankruptcy estate.”  The trustee has control of this estate.

Along with your petition for relief, you file a number of supplemental documents known as “Schedules.”  These are usually prepared by your attorney.  In these schedules, you list all of your assets, and use a state-by-state system called exemptions to protect those assets from the trustee.

The exemptions you are permitted to use is based on where you live, how long you have lived there, and how your state has set up its exemption system.  Some states have their own exemptions.  Some allow you to use the federal exemptions.  Still others, like California, let you choose from multiple options.

When an asset is not exempted, or if the full amount is not exempted, the consequence depends on the type of bankruptcy filing.  In chapter 7, that may mean the trustee will sell the asset, pay you the value of any exemption you did use on it, and will divide the rest of the money among your creditors based on the type of debt, and the amount owed.  In chapter 13, your plan will need to pay unsecured creditors at least as much money during the plan as they would have gotten from the sale of your non-exempt assets.  This is a complicated calculation, and one you should discuss with a bankruptcy specialist prior to filing.

In the great majority of cases we file, our clients are able to protect all of their assets.  In other cases, there are simple steps the clients can take prior to filing to make sure they get the best result possible, and protect as much of their property as they can.  The myth of going bankrupt and losing your shirt is just that: a myth.

~Andrew

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