How can I keep my stuff in bankruptcy?
At our firm, we understand that two top concerns for many people considering bankruptcy are (1) keeping their possessions and (2) obtaining peace from worry over debt collection. For most individuals, there are bankruptcy options to keep most types of property.
For the purposes of this post, we can group property into two categories: (1) collateral property, that has been pledged to secure a particular loan and (2) unencumbered property that has no liens or loans associated with it. A car with a lien on the title is collateral property, while the shoes on one's feet would be unencumbered property.
Keeping Unencumbered Property
The allowances provided by the property exemptions are the first tool for keeping unencumbered property. A valid exemption claim prevents the bankruptcy trustee or creditors from taking the item. There are a number of exemptions under state and federal law, each limited by either (i) the type of property claimable (for example, social security benefits); (ii) the value of the property; or (iii) both value and type of property (for example, a car with net value of $3,500 or less). Sometimes multiple exemptions are used for one item ("stacking" an exemption), such as claiming a car under both a motor vehicle exemption and a wild card exemption to achieve a greater dollar amount of protection.
In chapter 7, the bankruptcy trustee will considering selling property that is unencumbered and not exempt. On the other hand, in chapter 13, the trustee is not in the business of selling property. Instead, in chapter 13, the debtor keeps his or her unencumbered property and must pay to creditors in his or her chapter 13 plan an amount of money equal to the value of the non-exempt property under the "liquidation test". Elsewhere, I discuss how the liquidation test impacts a chapter 13 plan in more detail.
Keeping Encumbered Collateral
When property is or has become collateral to a secured loan, this secured status must be considered in order to keep the property through bankruptcy. A creditor's right to repossess or foreclose collateral survives bankruptcy in the general case. Therefore, to keep collateral property, one must either (1) pay for the collateral or (2) find a grounds to remove the lien and make the debt unsecured.
The baseline option, particularly if payments are current on the loan, is to keep making the payments and keep the collateral. From there, things get more complicated and fact intensive. For example, chapter 13 bankruptcy allows repayment term modification for certain types of loans. Sometimes, a debtor might be able to pay the value of personal property collateral in chapter 7 and redeem the collateral free of the lien.
Liens can sometimes be altogether removed, leaving the debt as unsecured. If a creditor is secured by a judgment lien, often a debtor may partially or completely remove that lien by avoiding the lien as an impairment of exemptions. If a lien is defective under state law, the bankruptcy might treat the loan as unsecured. Junior liens, such as second mortgages, might be treated as unsecured if more is owed on the senior lien than the property is worth.
If there is net equity in encumbered collateral, that net value is treated the same was as unencumbered property. Exemptions can be used to protect net equity, and chapter 13 can prevent the sale of property with non-exempt net equity.
Keeping property in bankruptcy can benefit from careful pre-filing planning with the assistance of a qualified bankruptcy attorney.