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The Types of Bankruptcy
What do you get to keep after bankruptcy? This is a common question. The answer is, it depends on which chapter of bankruptcy you have declared, on what assets you are hoping to keep and on the state where you live.
There are two primary chapters of bankruptcy that are used by individuals. These are:
- Chapter 7
- Chapter 13
Chapter 7 requires a debtor to qualify by passing an income test, also referred to as a "means test." This means that the debtor must either make below the median income level for his or her state, or the debtor must demonstrate that he does not have a sufficient amount of income coming in to sustain his or her required expenses and still repay any of his debts. The exact requirement of the means test will vary from jurisdiction to jurisdiction, but as a general matter, if you have 25 percent of your income left over after all of your required expenses have been taken care of, you may not be eligible for a chapter 7. Chapter 13, on the other hand, does not require debtors to take a means test.
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What Do You Get to Keep With Chapter 7?
With a chapter 7, you are required to turn over any assets that aren't covered by an exemption. These assets will be liquidated and sold in order to generate money to repay the creditors that you are declaring bankruptcy on. Exemptions exist on both the federal level and the state level. In some cases, you may have a choice regarding whether to take advantage of federal or state exemptions. You cannot, however, simply declare bankruptcy in another state to take advantage of more favorable exemptions. Residency requirements prevent this type of behavior.
Common exemptions, on both the federal and the state level, include:
- Some or all of the equity in your home (this is referred to as the homestead exemption).
- Pensions such as money kept in an IRA, 401K or qualified 403B plan.
- "Tools of the trade" or things that you need to keep to do business.
- Personal vehicles if their value is below a certain amount (commonly $2500 or less).
- Personal property (this is usually covered under a "wildcard" exemption where you are allowed to keep items of your choice up to a certain dollar value.
Additional exemptions may exist as well depending on where you live and your age. For example, generally those who are over 65 years of age at the time of declaring bankruptcy will be allowed to keep a larger portion of their home equity.
Anything that falls within an exemption can be kept provided it is not serving as collateral for secured debt (in which case, it can be kept only if you recommit to paying that debt despite the bankruptcy). Anything that does not fall within an exemption may be liquidated in a bankruptcy sale. The proceeds from this sale are going to be used towards paying debts; after the money is distributed to creditors, any remaining eligible unsecured debts are discharged.
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What Do You Get to Keep With Chapter 13?
If you declare chapter 13, exemptions are not important and there is not any specific requirement that you turn over assets. This means that you get to keep all of your possessions. Possible exemptions to this general rule do exist, though, if you owe money on a secured debt. For example, if you own a vehicle, you may not keep the vehicle and have the debt for that vehicle forgiven during the chapter 13 process. If you owe money on a secured debt, just as with chapter 7, if you wish to keep the debt you will need to recommit to paying that debt with the creditor. The creditor may (but doesn't have to) negotiate the debt down for you to the market value of the asset if the debt balance is worth more than is owed on it.
Of course, this doesn't mean you just get your debt erased while keeping all your assets. With a chapter 13 bankruptcy, a repayment plan is created that generally lasts for between three and five years. You must repay a portion (or all) of your debt over this period of time. Monthly payments are based on your income and debts and the repayment plan must be approved by the creditors who you owe your debts to.
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Which Chapter is Right For You?
Deciding which chapter of bankruptcy is best for you will depend on what you qualify for, how much debt you have and the nature and extent of your assets. It is a decision best made with the help of a qualified legal professional.
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References and Resources
For more information or additional details about the question of what do you get to keep after bankruptcy, you can visit:
- The Negative Consequences for Filing Bankruptcy You Need to Consider
- What is Chapter 13 Bankruptcy? Chapter 13 Bankruptcy Explained
- US Courts: Bankruptcy Basics
- Morgue File.com/jdurham