“I want to file for bankruptcy but do not want to include my car or my house. Is that possible?”
Through the most common form of consumer bankruptcy, Chapter 7, people are essentially saying that they don’t have the disposable income to make debt payments and want to have that debt eliminated. As part of the process, consumers may have their assets seized and sold off to pay off at least a portion of their debts.
However, not all of their property can be seized. Some assets — including cash, your home and your car— are exempt from the bankruptcy, based on how much they are worth. Exemption amounts vary from state to state, but generally, any assets with equity lower than the exemption amount cannot be seized. Retirement accounts, such as 401(k) plans and pensions, also are protected from being seized during bankruptcy, though some people with a traditional IRA or Roth IRA may find that the exemption for retirement savings is capped at nearly $1.3 million.
“What the government wants is for you to have a method to be able to rebuild your life,” said Stein Olavsrud, a financial planner and portfolio manager with FBB Capital Partners in Bethesda.
Say the exemption amount for a house in one state is $100,000. A person with $50,000 in home equity would not have that house seized. But someone with $125,000 in home equity could have that property seized and sold to pay part of their debt.
In some cases, people filing for Chapter 7 can keep their cars by filing what’s known as a reaffirmation agreement, said William Waldner, a bankruptcy attorney in New York City. The agreement basically confirms to the lender that the person will still be on the hook for the car loan, even though he or she is filing for bankruptcy, Waldner says. But people should keep in mind that they risk losing their cars later if they fall behind on their payments after they file for bankruptcy.
Chapter 13 bankruptcy is a different process where consumers can work out a plan for paying off a portion of their debt over three to five years. People who file Chapter 13 won’t lose their property as long as they keep making payments on time, Waldner said. And consumers who start off filing Chapter 7 bankruptcy but then realize that their property may be seized may be able to switch to Chapter 13 bankruptcy, which would allow them to keep their assets and catch up on payments, he said.
So, it is possible to file bankruptcy and keep your house and your car. But consumers who are thinking about it should speak to an attorney and research the bankruptcy exemptions in their state to know exactly how much of their property is at stake, Waldner says.
It’s also worth noting that certain debts, such as student loans, tax debts and child support obligations, cannot typically be discharged through bankruptcy. And bankruptcy also can stay on a consumer’s credit report for up to 10 years, making it more difficult for them to qualify for new loans and potentially hurting them in other situations where their credit may come into play, Olavsrud said. “It’s something to be taken seriously when you have no other option,” he said.