Bad financial decisions may lead to economic problems. Filing for bankruptcy under Chapter 7 may provide you relief from your debt collectors. However, in the process you might end up losing some of your property. However, all is not lost as people who file for bankruptcy under chapter 7 are allowed to keep certain full exempt property. Exempt property is protected from creditor’s claims by the law. Some states like Colorado allow property to be exempt only under state law. Exempted property includes a portion of or the entire unpaid wages, household furniture, personal effects and home equity.
In case you have incurred medical or credit card bills or taken personal loans which you find yourself unable to repay, there is no need to worry. You can file for chapter 7 or “liquidation bankruptcy”, which is one of the simplest and quickest way to take care of such issues as per Los Angeles based law firm Recovery Law Group.
When you file for bankruptcy, your entire property (excluding pension and educational trusts) becomes part of the bankruptcy estate, which includes:
• Property you possess
• Property you own but have loaned to someone else
• Property recently donated/gifted
• Share from marital property
• Rental income from any property you own
• Property you are entitled to, but haven’t yet received
• Any assets (inheritance, lottery etc.) received within 3 months of bankruptcy filing
Any and all of these are under the control of the bankruptcy trustee during the course of your case.
Exemptions under Liquidation Bankruptcy
While filing for bankruptcy under Chapter 7, most people are concerned about what property they will be allowed to keep. The proceedings under federal law take place through a court appointed authority (bankruptcy trustee) who pays your creditors by selling off your assets. It is therefore important to know about the exemptions under this category of bankruptcy. You are allowed to keep some amount of property so that you can start afresh. Any asset that you can exempt cannot be sold off to pay your creditors. The laws as to how much property you can keep vary from state to state. You can, depending on the state you file bankruptcy in, opt for state exemptions or choose between state and federal exemption system. Most states as well as the federal system allows you to keep some equity in your house, personal property (vehicle, retirement account etc.), clothes and household goods unless they are extremely valuable.
How do Exemptions Work?
While filing the bankruptcy paperwork, all your property is listed and you can claim exemption for any and all items mentioned in it. In case, the entire property is covered under exemption, you can keep it. Any property not covered under exemption can be sold by the trustee to give the proceeds to the creditors. In case, the property is only partially covered under exemption, or you have a car payment/mortgage, things can be slightly complicated. In such a case, the creditor gets paid first. Depending on the exemption granted by the state, your vehicle could be sold or not. In case you have the option of wildcard exemption scheme, you can use it along with vehicle exemption to protect more vehicle equity.
What Happens When Trustee Abandons Property?
In case you can’t fully exempt an asset, the trustee can abandon the liquidation process if it won’t generate enough income to pay off the creditors. This takes place when the value of property is slightly more than the exempted amount. It should also be noted that selling any asset also involves various fees and costs. In case the trustee abandons property, you can keep it.
Can You Buy Property From Bankruptcy Estate?
An asset which you are unable to exempt but you would like to keep, can be purchased at a discounted rate (value of asset minus sale related cost & fees) if the bankruptcy trustee allows it. In this case you need to show that you are using funds beyond those mentioned in the bankruptcy estate, like taking a loan from friend/family member or post-filing wages.