Personal Bankruptcy and Bankruptcy Exception Laws
Life After Bankruptcy: What Can You Keep?
Declaring personal bankruptcy is never an easy decision — dealing with the uncertainty, the shot to your pride and, of course, worries over your credit. But the fact is that, every year, over 2 million Americans go bankrupt, practically if not officially, and some experts say that most of those people would be better off if they filed and officially declared themselves unable to pay their debts. So while no one denies that declaring personal bankruptcy is a personal hardship, there is life after bankruptcy. And today's bankruptcy laws allow you to keep certain assets, even after you've filed.
What do I have to do first if I am considering filing for bankruptcy?
In April 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act officially amended the U.S. Bankruptcy Code and is now recognized as the uniform federal law that governs all bankruptcy cases.1 Today, you must take each of the following steps to officially file a bankruptcy claim:
- Choose and file for a specific type of bankruptcy. There are two types of bankruptcy for individuals or personal bankruptcy — Chapter 7, where your assets are sold off to pay creditors, and Chapter 13, where you can develop an interest-free repayment plan. You must apply for one type or the other, and your eligibility for each is based on your reported income when you file.
- Arrange for official credit counseling. New laws require that you must work with a licensed counselor for the bankruptcy filing to be legitimate.
- Attend a meeting of your creditors. In almost all personal bankruptcy cases, this is the only official proceeding you must attend. Informally called a "341 meeting" (named after section 341 of the Bankruptcy Code), it's designed for you to meet directly with your creditors so you can answer specific questions about your overall debts and property. This meeting usually takes place 20 to 40 days after you file the claim.1
Once I've officially filed for bankruptcy, what assets — if any — may I keep?
In terms of your life after bankruptcy, let's look at both Chapter 7 (called "liquidation" or "straight bankruptcy") and Chapter 13 (known as "reorganization") separately. Something important to remember here: Even though bankruptcies are regarded as federal proceedings, there are certain exemptions that vary from state to state.2 Before you file, be sure to familiarize yourself with specific state laws so that you can best determine which properties and other assets are deemed exempt and can't be sold off.
Now, let's further examine the two most common types of personal bankruptcy and identify some rules regarding the items you can get back:
Chapter 7. In most cases, a trustee is placed in charge of your existing assets and assigns cash values to each of them. From there, the trustee divides up the assets among your creditors. Since most Chapter 7 filings don't usually include non-exempt properties (meaning that everything you have — all your assets — can be sold off), these are often called "no-asset cases." No-asset cases are usually closed within four months of filing, while asset cases tend to close about two to four years after filing.3
There are some state-by-state exceptions, though; Florida, for example, is considered a "debtor's paradise" because you're allowed to keep equity in luxury items like cars and homes.4 Some states allow you to keep the following assets even after you've filed for bankruptcy:
- Unlimited equity amount in your home. Let's say your home is worth $1 million dollars and you only have $100,00 left on the mortgage. The remaining $900,000 can remain legally yours as long as you can prove it's your primary residence.
- Any car valued at less than $6,600. You may even be allowed to keep two cars if their combined value is less than $6,600; you can also continue to lease one or more cars if you can keep up with monthly payments.
- Unlimited IRA contributions. As long as you can prove the account is a legitimate IRA and not a savings or money market account, you can keep your IRA.
- Your passport. You may, however, need written permission from your trustee if you want to travel overseas.
Remember that, because some of these examples only apply to the bankruptcy laws of certain states, you'll want to work with an investment counselor directly after you've made the decision to file.
Chapter 13. If you file Chapter 13 — again, called "reorganization" — you may be able to keep the following assets:
- Your home
- Any stocks you own
- Personal items, like clothing, jewelry and artwork, as long as the total value of these items is less than $1,000
Because Chapter 13 bankruptcy, by definition, is based on an interest-fee repayment plan, you can maintain these items based on how much you're earning. Think of it as a "give and take" while the government allows you to get back on your financial feet.
Declaring bankruptcy is a trade-off — you get to say "goodbye" to your debts, but current laws require you to maintain your "bankrupt status" for at least three years. Nevertheless, there is life after bankruptcy. And even though your credit will take a hit, today's often unpredictable financial landscape may require you to declare personal bankruptcy.