Good question. Chapter 7 bankruptcy is designed to decrease debt by liquidating assets to pay off creditors. In reality though, you have some options and exemptions which ensure that you aren’t left with nothing.
Chapter 7 bankruptcy works by selling – in a process known as liquation – valuables to pay off accumulated debts. Many types of property and possessions can be liquidated in a bankruptcy case, but there are some exceptions to the rules. Find out what you can keep and what you may have to let go.
Chapter 7 Bankruptcy – What is the Benefit of Filing?
Why would you want to give up your valuable property and possessions? Liquidation in Chapter 7 bankruptcy is meant to help free you from the accumulated debt which you are struggling to pay off. Those who are eligible for Chapter 7, and who complete all of the bankruptcy requirements, will have their remaining debts discharged.
Non-exempt Assets – What Can Be Liquidated?
Anything which is not protected by federal or state exemptions is known as a non-exempt asset. Property, possessions and income which are not exempt (see below) are sold to pay creditors as much of the amount owed as possible.
Non-exempt items include:
- Vacation home,
- Second car,
- Inherited items of value,
- Cash, checking and savings accounts, stocks, bonds or other investments.
These are just a few examples. The debt that remains after liquidation is discharged – meaning that it’s canceled out – once the bankruptcy requirements are met.
Exempt Assets – What Cannot Be Liquidated?
Debtors who file for Chapter 7 bankruptcy are allowed, by law, to keep a limited amount of property, possessions and income. These allowances are known as exemptions. State and federal bankruptcy exemptions protect your property from creditors, from liquidation by the trustee and help you rebuild your financial stability after filing.
Property Exemptions in Ohio
When filing for bankruptcy in Ohio, the debtor can keep a limited amount of property, possessions and income. The most common is called the ‘homestead exemption,’ which allows a debtor to retain his or her primary residence. In Ohio, this currently applies up to an equity value of $136,925.
According to the state, exempt assets include:
- The main residence of the person declaring bankruptcy, up to $136,925 of equity,
- As much as $3,775 in value for one vehicle,
- As much as $12,625 of household items and furniture and jewelry,
- As much as $1,600 in value of jewelry,
- Public assistance, pension or a portion of your regular wages.
See a more detailed list of the property exemptions in Ohio bankruptcies.
How Exemptions Are Applied
When you file for Chapter 7 bankruptcy, you will be required make a list of all the property and assets you own. Then, your lawyer will indicate which items are considered exempt and which are subject to liquidation. There are four possibilities for how the asset will be handled by the bankruptcy trustee:
|Can Be Liquidated||May Not be Liquidated|
|Non-exempt Property of Value||Fully Exempt Property|
|The trustee can sell any assets not covered by an exemption and use the proceeds to pay off your creditors.||If the exemption covers the full value of the home, car or other asset, you will be allowed to keep it.|
|Partially Exempt Property||Non-exempt Property of Little Value|
|Assets that have more equity value than the exempted amount, can be liquidated in order to pay creditors. You will be paid the maximum exempted amount once it’s sold.||If the property has no equity or if the trustee doesn’t think selling it will provide enough money to be worthwhile, you can keep those assets.|
Secured Debts – What Are My Options in Chapter 7 Bankruptcy?
Home mortgages and car loans are two common types of secured debt. This means that if you fail to make payments on these types of loans, the creditor can repossess the house, car or other asset. Once you qualify for Chapter 7 bankruptcy, you have three options when it comes to assets that were bought with secured loans.
- Let the bank take the asset. If a debtor lets the bank repossess the car or home in a bankruptcy case, the remaining part of the loan is discharged. This means that you don’t have to pay back the part of the loan that was unpaid.
- Keep the asset by getting up-to-date on loan payments. If the house or car is completely exempt, it won’t be liquidated if you get current with the loan payments.
- Pay off the asset. You can save a car or house, which would be considered exempt, from liquidation by simply paying the creditor the total fair market value.
Also read How Does Filing for Chapter 7 Bankruptcy Affect My Tax Return?
Do You Qualify for Chapter 7 Bankruptcy?
Not everyone struggling with debt qualifies for Chapter 7 bankruptcy. Let a professional explain your options and assist you in finding the best solution for your financial situation.
Contact Amourgis & Associates for advice you can trust in your time of need.