Many people facing serious financial difficulties fear that filing for bankruptcy means that they will lose all of their property. This is not the case, even if you file for a liquidation bankruptcy under Chapter 7. Whether you file under Chapter 7 or Chapter 13, you can claim a long list of exemptions under state or federal laws. These will protect some or all of the value of important assets, such as your home, your car, and equipment necessary for your job. There is also a wildcard exemption in many states and in the federal bankruptcy scheme, which allows you to protect property that is not covered or not fully covered by other exemptions.
However, certain types of property will not have specific exemptions to cover them, and the wildcard exemption goes only so far. These are often types of property that are not necessary to your home or your work, or to the safety and wellbeing of your family. Some examples might include expensive artworks, luxury cars, and vacation homes. What happens to non-exempt property in a Chapter 7 bankruptcy differs from what happens to it in a Chapter 13 bankruptcy. Understanding the difference may help you decide which type of bankruptcy works better for you.
Non-Exempt Property in Chapter 7
A Chapter 7 bankruptcy involves the liquidation of a debtor’s non-exempt assets. They will turn over any property in this category to the bankruptcy trustee so that the trustee can sell it to pay off their debts to unsecured creditors to the extent possible. The trustee first will pay off priority unsecured debts, which may include unpaid taxes or arrears in child support or spousal support. Any remaining non-exempt assets will go toward paying non-priority unsecured creditors, which may include health care entities, utility companies, and credit card companies.
In many cases, a debtor who files under Chapter 7 will be able to exempt all of their assets because they have very little income or property. Non-priority unsecured creditors thus never may be able to collect on their debts, which will be discharged at the end of the proceedings. Some types of debts, such as taxes, domestic support, and student loans, cannot be discharged without being paid and will persist after the bankruptcy ends.
Non-Exempt Property in Chapter 13
A Chapter 13 bankruptcy does not involve a bankruptcy trustee taking the assets of a debtor. You can keep your non-exempt property under Chapter 13, which is one of the main ways in which it is different from Chapter 7. However, you should be aware that the amount of your non-exempt property will affect the monthly payments under the repayment plan in Chapter 13. To ensure that a debtor does not receive a windfall by filing under Chapter 13 rather than Chapter 7, they will pay the value of the non-exempt property to unsecured creditors. You will need to complete the repayment plan within a period of three to five years, which amounts to a maximum of 60 monthly payments. If you have a substantial amount of property, while you are not receiving much income, you may have trouble meeting the amount required for the monthly payment. This is an issue that the bankruptcy trustee may raise and that the court may need to weigh at the confirmation hearing on your proposed plan.