Most of the time you get to keep whatever you own when you file bankruptcy. The following ten truths will give you the reassurances that you need and help you be aware of issues before they become problems.
Here’s how assets and exemptions work in bankruptcy:
#1. Exemptions can be more complicated than they might seem: The simple rule is that you get to keep everything you own as long as it all fits within “exemptions,” categories and amount of assets that you are permitted to have. But there is much more to protecting your assets than just matching assets to exemptions. Although some exemption categories are straightforward, important ones often are not. Some require knowing prior court decisions, and/or how the local trustees and judges are informally interpreting them.
#2. Federal and state sets of exemptions: Congress has left it up to each state whether to allow its residents to use a federal set of exemptions in the Bankruptcy Code for bankruptcies filed in that state, or instead require the use of a set of exemptions created by the state. You have to start by knowing which set of exemptions you are allowed to use. And if you are allowed to use either one, it’s not always clear which of the two sets would be better for you. (Outside of some very limited exceptions, you can’t pick and choose exemptions from both the federal and state ones.)
#3. Which set of exemptions you must use can depend on how long you’ve lived in your present state: If you have not been “domiciled” in your current state for two full years before filing bankruptcy, you can’t use the set of exemptions available to residents of your current state. You must use the state you were “domiciled” in during the 6-month period immediately before those two years. And there some other twists and turns in these rules. So depending on the exemptions available to residents of the two states, sometimes it make sense to hurry to file your case to take advantage of your prior state’s exemptions or else to delay filing to take advantage of your new state’s exemptions.
#4. If you have assets that are not covered by the available exemptions, you can often still protect those with wise pre-bankruptcy planning: This is one of the most important reasons to meet with a competent bankruptcy attorney way before you are pushed into filing a last-minute bankruptcy. Because any transactions you get into involving your assets before filing bankruptcy can be scrutinized by the bankruptcy trustee and/or creditors, it’s crucial that you get thorough legal advice beforehand. And you should truly do this as soon as possible. Doing so can make the difference in protecting what’s important to you.
#5. Some trustees are more aggressive about claiming your assets than others, and the value of your assets can be debatable: Bankruptcy trustees make the first determination (subject to review by the bankruptcy judge) about whether your assets are worth what you say they are and whether any of your assets are not exempt—not protected. And you often don’t know which trustee will be assigned to your case. They must follow the law, but they do exercise a lot of discretion. Plus sometimes the law is not completely clear, and the actual value of an asset can be anything but clear.
#6. You must be thorough in listing assets AND exemptions: If you aren’t thorough in listing your assets in your bankruptcy documents, that can jeopardize your whole case. In extreme cases it can potentially even lead to criminal charges against you by the U.S. Attorney for bankruptcy fraud. Even in less serious situations, if you don’t include an asset that would have been exempt you can lose the right to claim that exemption later. This can result in the trustee taking that asset from you, even if it could have been protected had your bankruptcy documents been more complete.
#7. Even if you do have an asset that may be worth more than the exempt amount, the trustee will still not necessarily take it from you: Trustees can decide not to pursue an asset that is not exempt, or a part of which is not exempt, for the following possible reasons:
1) the asset is not worth enough to justify the trustee’s efforts to collect or liquidate it;
2) the trustee is unwilling to pay the costs of collecting or liquidating it (such as the attorney fees required to chase down somebody who may owe you money and refuses to pay); or
3) the asset comes with risks or other detriments which seem to outweigh its potential value (such as a parcel of land polluted by hazardous waste).
#8. If you have an asset that you want to keep that is not exempt, you can usually pay the trustee for the right to keep it as long as you can pay enough to do so within a few months: Paying your bankruptcy trustee for the right to keep something you already own (such as a vehicle) may seem unfair, but that could well be better than losing it. If the alternatives would be either letting go of the vehicle or filing a 3-to-5 year Chapter 13 case to save your vehicle, then paying off the trustee over the course of a few months (after you’ve stopped paying your creditors) may well be your best option.
#9: Sometimes you don’t mind having the trustee claim an asset: Under certain circumstances you may actually want the trustee to take a certain asset or two that are not exempt (protected). You may not need them—such as the remaining assets of a closed business—and you might actually be glad to hand the liquation task over to the trustee. This would particularly be true if the trustee would be paying a part of the proceeds of sale to a “priority” debt that you would have to pay anyway, such as taxes or back child support.
#10. The difference in exemptions under Chapter 7 and Chapter 13: Although the set of exemptions used in filing under both chapters is the same, the exemptions are used quite differently. Under Chapter 7, the exemptions determine whether you have any non-exempt assets for the trustee to take from you (and distribute among your creditors). Under Chapter 13, the exemptions are applied similarly but for the purpose of determining how much if any has to be paid to your creditors during the life of your Chapter 13 plan.
As you can see, there are many potential factors involved in protecting your assets in a bankruptcy case.