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What Will I Lose If I File for Bankruptcy?

12 August 2010

Most of the time, in terms of assets, the answer is nothing.Assets are generally only at issue in Chapter 7 filings.  Part of eligibility for Chapter 13 is paying unsecured creditors at least as much as they’d receive in a Chapter 7 liquidation, so protecting assets should be built into every Chapter 13 plan.

Chapter 7, on the other hand, is a liquidation bankruptcy.  Any non-exempt assets may be sold, at the discretion of the Trustee appointed to administer the case, to pay unsecured creditors.  That means any assets that Congress or the state legislature hasn’t expressly said debtors can keep in bankruptcy will be sold to repay the claims of creditors, if the trustee believes it would be worth the effort and expense to do so.  Congress established a set of exemptions, a list of assets and their values that can be protected by individuals in bankruptcy.  They also allowed each state to “opt-out” and establish their own exemptions.  Kentucky, where my office is, allows Debtors to use either state or federal, but the federal are almost always preferable.  In nearby Ohio, Debtors must use the Ohio exemptions, which are largely similar to the federal exemptions, except for cash assets.

As exemptions are generally fairly generous and most debtors don’t have a lot of equity in their property by the time they see me, the vast majority of cases filed under Chapter 7 are no asset.  Sometimes, though, a debtor will have enough equity in a house, car or other asset that there is a significant risk that the Chapter 7 trustee will sell that asset.  In that case, the Debtor will either have to surrender the asset or pay its non-exempt value through a Chapter 13 plan.

Several things can create problems for the unsuspecting, so consulting with a bankruptcy attorney familiar with protecting assets before filing is the best way to protect your assets.  If a lien on an asset, like a house or a car, is not properly recorded, that can cause you to lose that asset in bankruptcy.  Worse, transferring an asset out of your name before filing prevents you from claiming an exemption in it, but will almost never protect it from the bankruptcy trustee.  Worst of all, transferring an asset out of your name and then failing to mention it is bankruptcy fraud, a federal felony.  Aside from risking jail time and steep fines, you also risk losing your discharge, which was why you filed in the first place.

Generally, ninety percent of success in bankruptcy is filing an accurate petition.  If you tell the truth and follow Court orders, while bankruptcy can certainly impact your credit, all you really stand to “lose” in bankruptcy is your debt.

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