With Chapter 7 bankruptcy, the goal is to eliminate the debt. Typically, the person filing does not lose any assets. Occasionally someone will file knowing they will lose an asset but decides to file anyway because of the amount of debt they owe and they cannot afford to pay the equivalent value of that asset in a chapter 13. For example, someone who owns an $80,000 sports car with no lien on it will result in a trustee selling the car to pay something to the unsecured creditors. If that doesn’t cover the entire amount, the rest of the debt can be forgiven.
But people are often worried about filing for Chapter 7 because they think it’s going to leave them with nothing. They want the financial freedom that comes with absolving their debt. But they don’t see the point in getting that financial freedom if it means they don’t have any assets to their name. Is this what happens?
A common misconception
This is actually one of the more common misconceptions that people have about Chapter 7. The bankruptcy code provides you with exemptions meaning you can protect your assets. In most cases, all of your assets are protected and it would be very unusual to lose any assets.
For example, there is a homestead exemption for equity in your house, an exemption for a vehicle that you drive to get to work and exemptions for many other things like furniture, clothing, jewelry, etc.
Only if the asset is excessive would it be sold by the trustee. That’s why the $80,000 sports car is used as an example above.
Getting the process started
Additionally, Chapter 7 isn’t the only option. Chapter 13 bankruptcy can be used to keep an asset even if it is not exempt.
