Will My Belongings Be Liquidated in Ch 7 Bankruptcy?

Posted on December 24, 2013 at 8:09am by

When an individual or couple files a Chapter 7 bankruptcy petition, they must file a schedule listing out all of their assets such as cars, home, jewelry, investments, furniture, bank accounts, etc. Additionally, a schedule listing all debts, including bills like back taxes or student loans, car leases, mobile phone contracts, or any other amount of money they owe someone.

In Chapter 7 bankruptcy, a Trustee is appointed by the bankruptcy court to liquidate assets in excess of what a debtor can protect, for the benefit of a debtor’s creditors. However, state and federal law provides “exemptions” allowing debtor’s to protect specific types of assets up to a certain amount. Let’s look at an example to better understand the idea of exemptions. These exemptions can and do vary greatly in the amount exempt from creditors depending on which state you live in.

For example, in Kansas, state law provides that an individual can protect up to $500,000 in equity or value of their home from creditors. This exemption for a home is commonly called the “Homestead” exemption. What does that mean?

Dave and his wife Donna live in a home that is currently worth $300,000 in Olathe, KS. Dave also has a mortgage against that home with a balance of $125,000. Well, Dave lost his job 8 months ago, while his wife Donna, was battling a serious illness that required her to be hospitalized. Medical bills piled up and Dave’s loss of income has made making ends meet extremely difficult. After 8 months of unemployment, Dave and Donna have managed to keep current on the mortgage, but unable to pay many of Donna’s medical bills, credit card bills, mobile phone bills, etc. And while Dave is fortunate to have found a new job, this one only provides an income half of his previous position. Thankfully, Donna is recovering but will not be able to return to work, which means the couple may never be able to dig out from under the bills.

In this situation, if Dave and Donna filed for a Chapter 7 bankruptcy in Kansas, the $500,000 “Homestead” exemption would allow Dave and Donna to keep their home if they want (along with keeping the mortgage against it for $125,000) and discharging or wiping out all the unsecured debts (the medical bills, credit cards, past due mobile phone bills, etc.).

The homestead exemption is just one exemption example, and there are many different types. There are exemptions for assets such as cars, 401(k) retirement plans, personal belongings, furniture, etc. Again, the types of assets protected and the amount that can be protected varies greatly depending on the state that you live in. It is important to seek information from an experienced bankruptcy lawyer in the state where you live, to find out what type of exemptions apply and what assets can be protected in Chapter 7 bankruptcy.



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