Almost all of us own property. When the term “property” is mentioned, most people think of land or a house. However, property includes any item or thing that a person may own or possess. So, land or a house are property, but so is a car, a couch, a computer, a wedding ring, a book collection, or a set of tools. In addition, intangible things (i.e. things that you cannot hold in your hands) can also be property. For example, if you have a checking account, that checking account is property. If you are a part owner of a business, your interest in the business is also property, and so on.
Can my property be seized in bankruptcy?
A question that inevitably arises for anyone considering bankruptcy is “what happens to my property if I file for bankruptcy?” In other words, what happens to all the things that we’ve accumulated over our lifetimes when a bankruptcy comes into the picture—can we keep our property, or do we have to give it up? The answer to this question can get fairly complex, and there are a number of factors that can determine what happens to a particular item of property in a particular situation. However, in a simplified form, to determine what will happen to a piece of property as a result of bankruptcy, you need to answer three questions.
The first question is: What kind of bankruptcy is being filed—a Chapter 7 bankruptcy, or a Chapter 13 or Chapter 11 bankruptcy? If you are filing a Chapter 13 or Chapter 11 bankruptcy (which are commonly referred to as “debt adjustment” and“reorganization”), then you can generally keep all of your property. However, you may have to pay your creditors all or a portion of the value of the property in question. To determine how much you will have to pay your creditors, you will need to answer the second and third questions you see below. If you are filing a Chapter 7 bankruptcy, then you will need to answer questions two and three to determine whether you can keep the property.
The second question that you will need to answer is: Is there a lien on my property, or, in other words, does my property serve as security for a debt? If there is a lien, and you gave your creditor that lien voluntarily (e.g. it is a mortgage), then you generally can only keep the property if you continue paying this secured debt. In a Chapter 7 bankruptcy, your ability to keep the property is, with some minor exceptions, the same as it is outside of bankruptcy. So, for example, if you are late on your payments and as a result your creditor can take and sell your property, a Chapter 7 bankruptcy will not alter that result. In a Chapter 13 bankruptcy, on the other hand, you can generally keep your property and force your creditor to accept late payments, as long as you can make the regular payments going forward.
Another possibility is that there is a lien on your property, but the lien was not voluntary. Such non-voluntary liens can be broken down into statutory liens (e.g. a tax lien) and judgment liens (i.e. liens imposed as a result of court judgments against you). In the case of statutory liens, you can usually keep your property if you pay off the lien after you file for bankruptcy. In some instances, you may also eliminate a statutory lien. In the case of judicial liens, you can often get rid of such liens on your home, vehicle, or personal property.
To sum up, when it comes to liens, in order to keep property you must either pay the liens or get rid of them (if permitted by law). If your property is not covered by a lien, or only partially covered by a lien (e.g. there is a $50,000 mortgage on a $100,000 house), or the lien was eliminated, then you need to answer question three below to determine what will happen to your property.
The third question is: Is my property exempt? The term “exempt” refers to property that state or federal law determines to be necessary to provide a minimum standard of living for a person. It is property that cannot be reached by most of your creditors without your permission. As an example, in Arizona you have a $150,000 exemption for a residence that you own. You also have a $300 exemption for funds in a bank account. If a piece of property is exempt, then you can keep it, regardless of whether you file a Chapter 7, Chapter 13, or Chapter 11 bankruptcy. If a piece of property is not exempt, then you usually cannot keep it in a Chapter 7 bankruptcy—it will be liquidated (sold), and the proceeds paid to your creditors. In Chapter 13 or Chapter 11, on the other hand, you can keep the property, but you will have to pay your creditors the value of the property through your debt repayment plan. So, to use one of the above examples, let’s say you live in Arizona and own a $200,000 house with no mortgage. If you file a Chapter 7 bankruptcy, the house will be sold, you will get $150,000, and the remainder ($50,000) will be paid to your creditors. If you have the same house when you file a Chapter 13 or Chapter 11 bankruptcy, you can keep the house, but you will have to pay your creditors $50,000 over the term of your plan. (For more information, read 7 Mistakes to Avoid When Filing for Bankruptcy in Arizona).
Please remember that the above is intended for general informational purposes only, and you should always seek advice from a bankruptcy attorney in your area if you have a question about your particular situation. Moreover, I am a Mesa and Tucson bankruptcy attorney, and therefore the above information is based on the law applicable in Arizona at the time of this writing. If you are outside Arizona, the law applicable in your jurisdiction may be different.