People who find themselves filing for bankruptcy for the first time often imagine being left with nothing more than the clothes on their back when the process is complete.
But nothing could be further from the truth.
The goal of the bankruptcy process is not to punish you – otherwise it wouldn’t allow you to either fully discharge or repay your debts on affordable terms. You’d just be forced to sell everything you own and become destitute.
Instead, the aim is to ensure that your creditors receive some financial compensation while also leaving you with the ability to create a fresh start for you and your family.
So, although you might think you’ll be left without a home, car or any of your personal possessions, many of them might actually be exempt from the bankruptcy process. This is because there’s very little benefit for the courts in leaving you in a position where you are unable to repay your debts or maintain a reasonable standard of living.
The items of property you’re permitted to retain ownership of are referred to as “exemptions”.
If you file for Chapter 7 bankruptcy you get to keep any property that’s included in your state’s exemptions, but non-exempt property is sold to repay some portion of your debt.
This is somewhat different to Chapter 13 filing where you’ll have to repay the full value of any property not specifically covered by an exemption. In some cases this could mean having to pay thousands of dollars that you hadn’t accounted for and may not have the financial resources to cover.
In terms of the exemptions themselves, these vary from state to state. But what is concrete is that each state has its own list of bankruptcy exemptions. But just to confuse matters there’s another set of exemptions known as the “Federal Bankruptcy Exemptions” which you can also use.
Some states allow you to use both sets of exemptions, but at least 30 states will demand that you choose either the state exemptions list or the federal one, but not both.
Another aspect of exemptions that you should be aware of are that you need to have been a resident of the state for at least 2 years before filing for bankruptcy – the state exemptions won’t apply to you otherwise.
Something else to be aware of is that your bankruptcy trustee can “abandon” certain pieces of exempt property. This basically means they give it back to you, even though it’s non-exempt.
Their reason for doing this is typically because the value of the item/property, minus the costs of administering the sale of it, won’t leave enough money for any part of your debt to be repaid. This happens more often than people expect, especially with pieces of property only worth a few hundred dollars.
You do also have the option of offering to buy certain pieces of non-exempt personal property back from the trustee. In these scenarios you’ll usually be offered the item at a discounted price. There is, however, one very strict rule that must be obeyed when buying back non-exempt property – the money to do so must not be part of your existing bankruptcy filing.
In most cases people will borrow the money from a family member or friend because their bankruptcy filing would indicate they don’t have the current financial means to support themselves – therefore they shouldn’t have ready cash to make purchases.
Please consult with your attorney as to what exemptions exist in your state before proceeding with any bankruptcy filing. This can and will prevent you from making costly mistakes.