One of the many myths about filing bankruptcy is that you will lose all your home and other assets if you file.
I hear this all the time from potential clients of mine, as well as other professionals with whom I network, people at cocktail parties, and others.
It’s simply not true.
In fact, if you have any assets sold involuntarily by the trustee in a bankruptcy case it’s likely because you got bad advice or filed the wrong chapter for your situation. But regardless, you should never unexpectedly lose assets in ANY bankruptcy chapter due to sale by the bankruptcy trustee. (Although under certain circumstances, secured creditors may seek to foreclose. See below)
Which Bankruptcy Chapter to File
Deciding which bankruptcy chapter to file is critical. There are eligibility requirements for each, but you may be eligible for more than one. Each bankruptcy chapter comes with its own benefits and costs. Knowing which one to file is a job for your bankruptcy attorney and beyond the scope of this article, but it is very important. Below are some important summaries of each Chapter.
Keep Your Home in Chapter 7
This is the most common chapter for individuals. It wipes out all dischargeable debt and there is no repayment requirement. The only “catch” is that you must give up any non-exempt assets to the bankruptcy trustee to sell for the benefit of your creditors. But in most cases, there are sufficient exemptions to protect all your assets. And if there aren’t, your bankruptcy attorney probably wouldn’t allow you to file Chapter 7. How to properly apply those exemptions is the job of a bankruptcy lawyer. How your assets are valued and exemptions applied makes all the difference in whether or not you can retain those assets in a Chapter 7 case. In over 20 years of filing bankruptcy cases I have never had one client lose any property unexpectedly in a Chapter 7 case through sale by a bankruptcy trustee.
You Can Always Retain Property and Assets in Chapter 13
You never lose assets in a Chapter 13 case, unless you choose to sell them. Otherwise they remain in the possession and control of the debtor (party) filing bankruptcy. You may sell (with court approval) any assets, but are never required to do so. The “catch” (or catches, actually) is that you must agree to a repayment plan with your creditors. This plan must pay out at least as much as your creditors would receive in a Chapter 7 case, and pay out at least the amount of your projected monthly disposable income each month.
And Assets Are Safe in a Chapter 11
As with Chapter 13, in a Chapter 11 case all assets remain in possession and control of the debtor. Debtors are, in fact, referred to as a “debtor-in-possession.” Also like Chapter 13, a plan must be proposed to repay creditors, but unlike Chapter 13, the creditors get to vote for or against the repayment plan.
A Note Regarding Secured Creditors in Bankruptcy
Secured creditors, such as the mortgage holder on your home, may seek permission from the bankruptcy court to foreclose or sell their collateral to satisfy their debt if certain conditions are met. But usually this means that you are in default on your payments prior to filing bankruptcy and did not stay current with required payments after bankruptcy. Lack of equity may also be a reason, depending on which Chapter is filed. But this is not unexpected. If you make your required payments, there would be no basis for the court to allow the creditor to do this. With proper planning and a good attorney, there’s no reason you shouldn’t be able to keep all your assets and get the relief you seek in any bankruptcy case.
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