One of the biggest reasons that people give for avoiding or putting off bankruptcy is the potential for the loss of their major assets. Most people only have a cursory understanding of how bankruptcy works, but the idea that the courts will liquidate certain assets is well known. People might imagine the loss of their home, their vehicle or just about everything else.
However, the actual risks to your assets may be less than you might assume. Bankruptcy is there to help people overcome debt and avoid poverty, not to push them into indigence by stripping them of everything they own. There are protections in place that allow you to retain some or all of your assets depending on your income, your assets and the nature of your debts.
Quite a few people go through the bankruptcy process without ever needing to liquidate their assets. Learning about the scenarios in which the courts will take your assets can help you better determine how to protect yourself if you file for bankruptcy.
Asset liquidation only occurs in Chapter 7 proceedings
The average individual or married couple with unsustainable levels of personal debt will file either Chapter 7 or Chapter 13 bankruptcy. A number of considerations, including their income and what assets they own, will directly influence whether asset liquidation is a concern in their bankruptcy filing.
Chapter 13 bankruptcy proceedings almost always protect the assets of the individual filing, provided that they successfully complete the repayment plan. Only Chapter 7 bankruptcy leaves a person vulnerable to the loss of their assets as a means to repay their creditors before their discharge. Even then, significant assets often receive protection from liquidation.
Only assets beyond what you can exempt are vulnerable in bankruptcy
Each year, the federal exemptions for bankruptcy increase based on the average cost of living. Those filing for bankruptcy have the right to use either state or federal exemptions to protect their assets from seizure and sale as part of a bankruptcy.
Currently, the federal exemptions allow for up to $25,150 of equity and $13,400 in household furnishings. You can also protect up to $4,000 in equity in a motor vehicle. In other words, your home, the items you furnished your home with and the vehicle you rely on for your job may all have protection from liquidation.
If your ownership interest in any of these assets are below that level and you don’t have substantial other possessions or assets that would be vulnerable to liquidation, you may want to perform the means test to see if you qualify for Chapter 7 bankruptcy. If your assets significantly exceed these exemptions, then Chapter 13 bankruptcy may be better for you, as it will allow for the protection of your assets.