If you are contemplating whether to file for bankruptcy, you may be concerned about having all of your personal possessions “liquidated” during the proceedings. Do not fret. There are specific rules and regulations governing which assets are eligible for bankruptcy liquidation and which assets are exempt. You may be surprised to learn that there are numerous assets and personal possessions that are protected during a bankruptcy proceeding.
Overview of Bankruptcy Liquidation
A bankruptcy liquidation typically occurs during a Chapter 7 bankruptcy. The process entails a bankruptcy trustee who is empowered to sell certain assets in order to repay certain unsecured debts. The common types of unsecured debts that are involved in the liquidation process include:
- Outstanding credit card bills;
- Child support; and/or
- Tax debt
Hierarchy of Debts
During the liquidation process, it is important to note that some debts are put at the front of the proverbial line as “priority debt.” For example, overdue alimony or spousal support, overdue child support, and/or tax debt, are known as prior debts that cannot be discharged.
Dispelling the Myth that Bankruptcy Liquidation Will Leave You Homeless and Penniless
There is a misconception about Chapter 7 bankruptcy that, unfortunately, many people believe. The misconception claims that someone who files for bankruptcy will be ordered to sell all of your personal possessions and assets to the point that you will be left homeless and penniless. This is wrong, plain and simple. A bankruptcy trustee is not empowered to sell all of your personal possessions and assets. In fact, there are specific assets and possessions that are completely exempt from the Chapter 7 bankruptcy process.
Assets Eligible for Bankruptcy Liquidation
For a Chapter 7 bankruptcy proceeding, both physical and intangible property that can be sold for the benefit of your creditors is deemed an “asset.” For example, your flat-screen television (physical property) and the balance in a savings account (intangible property) could both technically be liquidated by a bankruptcy trustee.
Overview of Assets Exempt from Bankruptcy Liquidation
There are a series of statutory exemptions that may allow you to protect various types of assets from the risk of being sold by the bankruptcy trustee. The exemptions that may apply to your case will depend on the state in which you reside. In addition, there are a set of federal exemptions you could use to protect certain assets.
It is worth noting that some states allow residents to choose between applying state-based exemptions and federal exemptions. However, most states require people to apply state-specific exemptions to their assets during bankruptcy.
Generally, the following types of personal possessions and assets are exempt from bankruptcy liquidation:
- A portion of the equity in your home
- Your car (up to a certain amount, based upon a valuation of the vehicle)
- Jewelry (up to a certain amount, based upon a valuation of the jewelry)
- Reasonably necessary clothing, household goods, and furnishings
- Pension benefits, social security benefits, and unemployment benefits
Overview of Non-Exempt Assets
Unfortunately, not all assets can be exempted during bankruptcy. There are certain items that are typically at risk of being liquidated, including:
- A second vehicle
- A second home, vacation property, or rental property
- Stocks, bonds, and other investment accounts
What a Bankruptcy Trustee Does During a Bankruptcy Liquidation
It is important to have a general understanding of what a trustee does and the role they play in the bankruptcy proceeding. Generally, a bankruptcy trustee is an independent contractor who is monitored by the Office of the United States Trustee. The trustee assigned to your case will be empowered to determine whether to liquidate non-exempt assets for the benefit of your unsecured creditors. In addition, the bankruptcy trustee will review your schedules and supporting documentation to validated which assets are exempt and which are non-exempt.
There are situations where a low-income individual with practically no assets files for Chapter 7 bankruptcy and all of their assets are exempt. In this scenario, the bankruptcy trustee will inform the court that they do not anticipate distributing any assets to the filer’s unsecured creditors. This will likely mean a relatively speedy administration and closure to the bankruptcy case.
If, on the other hand, the bankruptcy trustee determines that some assets are non-exempt, they will then engage in an analysis of the non-exempt assets to determine if they have sufficient value to invest the time and energy into liquidating the assets. However, it is important to note that you, the debtor, have the option to retain the asset, as long as you agree to pay the non-exempt value of the asset. Basically, this means if you have a non-exempt asset that holds a particular value to you (e.g., a family heirloom) you may still be able to keep it during bankruptcy.
Benefits Outweigh the Potential Costs
If you are concerned about having certain non-exempt assets liquidated during bankruptcy, it is important to take a step back and look at the big picture before immediately dismissing bankruptcy. For example, many individuals with a relatively low income who opt to file for bankruptcy will likely discover that most of their personal possessions are exempt from liquidation. In addition, the other benefits associated with Chapter 7 bankruptcy are typically worth having to sell a few non-exempt items. For example, filing for bankruptcy often means you enjoy an automatic stay that is put in place by a court that will halt all collection efforts and wage garnishments. In addition, many debts will be discharged entirely when you complete the bankruptcy process. The discharge of most outstanding debts is what enables you to get a fresh start with your financial future.
Now is the Time for Action
If you are feeling overwhelmed and anxious about the future because you owe so much money in debt, do not throw your hands up in despair. You have options that could allow you to get a “fresh start” with your finances. One of these options is filing for bankruptcy. Why? Because when you get through the bankruptcy process, you will likely have a tremendous financial weight lifted off your shoulders. To learn more, take action by completing the free evaluation form on this page.