What happens to my property in bankruptcy?

 

Asset protection is an important benefit of bankruptcy. Exemption laws are the laws that let you protect certain assetss from creditors. Every state has different exemptions. Some states allow you to use the federal exemptions.

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When you file for bankruptcy, all your property becomes part of the "bankruptcy estate." The bankruptcy trustee has control of your "bankruptcy estate property" while your case is going on. This property is to be distributed for the benefit of your unsecured creditors.

If that were the end of it, bankruptcy wouldn't be a very good deal because you'd be left with no property. Fortunately, that's NOT the end of the story.

Every state has "exemption laws" that say that specific kinds of property, generally up to a dollar limit in value, are exempt from collection by creditors.

These laws are applied when you file for bankruptcy. 

So, even though bankruptcy is a federal law, Georgia’s exemption laws may determine how much and what kinds of property you get to keep.

As it turns out, most people who file for Chapter 7 Bankruptcy lose no property at all because what little property they do have is, either

  • fully protected by exemption laws, or
  • pledged to secured creditors, and therefore not available to the bankruptcy estate.

These so-called "no-asset bankruptcies" are so common that there's a checkbox for it on the petition form. You can check a box to indicate that no assets will be left to distribute to unsecured creditors once you're done claiming your state's exemption laws.

Whether or not you file for bankruptcy, unsecured creditors cannot seize your exempt property to pay off your debt. Even if the creditor goes to court, wins a court judgment against you, and takes steps to attach a lien to your property, you are still entitled to your exemption amount before the creditor gets any proceeds from a sale.

If you sell your exempt property voluntarily, the creditor has a right to have its lien paid from the sale proceeds before you receive anything.

As a practical matter, most of the property of people who file for Chapter 7 bankruptcy is exempt, so they don't want to sell what they have. If all of your property is protected by exemption laws, you are said to be "judgment proof,"meaning that creditors can't collect anything from you, whether or not you file for bankruptcy.

Exemptions apply to your equity in property.

One important thing to remember is that an exemption protects only the "equity" in your property. That's the difference between the value of the property and what you owe to creditorslike your mortgage lenderwho have a secured interest in it.

Example

If you owe $18,000 on a $20,000 car, you have only $2,000 in equity. If your state has at least a $2,000 exemption for motor vehicles, that will be enough to protect the $20,000 car in bankruptcybut you must continue to make the payments to the secured creditor.

On the other hand, if you own the vehicle free and clear, then your equity is the full value of the vehicle, and a $2,000 exemption would not be enough to protect it. The trustee would force the sale of the car, you would get your exemption amount, and the trustee would get the rest of the proceeds to distribute to the unsecured creditors.

More Information

To learn what property is exempt in your state, see the Exemptions section of this website.


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Jurisdictional relevance: ST

There are versions of this article for each State.