What Is Protected in Bankruptcy?
Bankruptcy laws help debtors and creditors find a solution to resolving debts that are in excess of the debtor's ability to repay as agreed. Depending on the type of bankruptcy the debtor is declaring, the court may require a debtor to sell assets and repay some creditors before discharging debts. Bankruptcy law protects some assets from sale through exemption.
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Chapter 13
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In a Chapter 13 bankruptcy, no assets are sold by the court because the debtor repays creditors following a court-ordered settlement agreement over a three- to five-year period. Debtors get to keep assets such as cars and homes, as long as they can continue to pay for any outstanding balances on their mortgage or car loan. Chapter 13 bankruptcy also gives you the ability to make up any missed or late payments on a mortgage or car loan as part of the settlement.
Chapter 7
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In a Chapter 7 bankruptcy, the debtor must turn assets such as second homes and vehicles, jewelry over a set amount, collectibles of value, stock and other investments and family heirlooms over to the court. These are non-exempt assets the court sells, with the proceeds of the sale going toward debt repayment. Bankruptcy courts typically do not sell off assets that do not have a very high value, even though they are non-exempt, because the value will not cover the costs of the sale. Sometimes the court allows debtors to "buy back" assets in the sale.
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Non-exempt Assets
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The aim of bankruptcy is not to strip a debtor of the ability to survive and work in his trade. For this reason, there are assets that are exempt from sale. Exempt items include primary residence equity and vehicles up to a certain dollar amount, as well as household appliances, clothing and furniture, pensions, deferred compensation plans, health insurance plans, tax-deferred annuities and tools related to the debtor's job. Federal bankruptcy law limits exempt primary residence equity to $125,000. However, you could still lose your home through the foreclosure process if you do not pay your mortgage.
State and Federal Law
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States have their own limits, which can vary from federal bankruptcy law limits. Some states require you to adhere to state limits, while others give you the option to choose between the state and federal limits. The state of residence used for the determination of applicable bankruptcy law is the state the debtor lived in for the prior 730 days (two years), if he lived in the same state for that period. If he did not live in a single state for the entire 730 days, the state where the debtor lived for the majority of the 180 days prior to the 730-day period becomes the state of residence for legal purposes.
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References
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