What Will I Lose If I File For Bankruptcy?

There is a common misconception that a person filing for bankruptcy will lose everything he or she has.  That is not true.  Both the bankruptcy law and state law provide a set of “exemptions” that can be used to protect many common assets.  See our article on Assets You Can Keep in Bankruptcy.  But there are certain assets that are not protected, and here I will discuss some of the most common ones.  This discussion applies specifically to Chapter 7 bankruptcy, which is the most common type of bankruptcy.  Other types of bankruptcy have different rules.

Generally, property that can be lost in Chapter 7 bankruptcy is a property that is not considered essential to provide for a person’s necessities.  When it comes to specific property, the rules differ somewhat depending on the state of the person’s residence, and where the person resided during the two and a half years preceding the bankruptcy.  The following are the most common examples of property you can lose in Chapter 7 bankruptcy filed in Arizona:

• Second or subsequent vehicles. Individuals can claim an exemption for their primary vehicle, up to a certain amount.   However, any additional vehicles that a person may own are not protected.  For purposes of bankruptcy, a person owns a vehicle if it is titled in that person’s name.  One situation that often comes up is parents having their children’s vehicles in their names.  Even though the vehicle may be thought of as the child’s vehicle, if the parent’s name is on the title, it is, from the legal perspective, owned by the parent.
• Recreational vehicles.  All recreational vehicles, such as ATVs, golf carts, or motorcycles that are not primary vehicles, are not protected in Chapter 7 bankruptcy.
• Vacation homes. The person filing for bankruptcy can protect his or her primary home, up to a certain amount.  However, second homes or vacation homes cannot be protected and can be lost in Chapter 7 bankruptcy.
• Land and investment real estate. Raw land, as well as real estate used for investment, such as commercial buildings or rental properties, is not protected in Chapter 7 bankruptcy.
• Jewelry. In Arizona, a debtor can protect his or her engagement or wedding ring, up to a limited amount in value.  However, any other jewelry is not protected.
• Investments such as stocks, bonds, and mutual funds. Any type of investment in the stock market or in a financial instrument is not protected in Chapter 7 bankruptcy.  That may seem illogical—after all, almost everyone needs to save money to provide for their retirement.  Investments meant for retirement are protected in Chapter 7 bankruptcy, but they need to be placed in a qualifying retirement account.

An important point to remember is that when talking about a property that can be lost in Chapter 7 bankruptcy, we are talking about a person’s equity in the property.  Equity is the difference between the value on the property and any liens on the property.  For example, if you have a vacation home valued at $100,000, and there is a $100,000 mortgage on it, then the equity in it is $0.  You would not lose this vacation home in Chapter 7 bankruptcy, because you have no equity in it.

If you have any property that is not protected in Chapter 7 bankruptcy but still wants to file for Chapter 7, you may be able to keep the property by “buying it out” from the bankruptcy trustee.  In other words, instead of giving up the property, you would pay the bankruptcy trustee the equivalent of the property’s value.  This may be a good option for lower value property, such as small jewelry items or inexpensive vehicles.  This is usually not a good option for the high-value property.

If you have a high-value property that you would lose in a Chapter 7 bankruptcy, then Chapter 7 may not be the right option for you, and you may want to consider Chapter 13 bankruptcy.  In Chapter 13 bankruptcy, you can keep all of your property, and instead make payments toward your debt over a period of time.  See Common Questions About Chapter 13 Bankruptcy.  Before you make a decision as to which type of bankruptcy to file, it is best to consult with a qualified bankruptcy attorney in your area.  If you are considering filing for bankruptcy in Arizona, Yusufov Law Firm can help select the right type of bankruptcy for your situation to maximize the benefits of bankruptcy.  To schedule your free consultation with an Arizona bankruptcy attorney, please call 480-788-0098 in Phoenix/Mesa or 520-745-4429 in the Tucson area.