Personal Property

Yes and No. The term “secured debt” applies when you give the lender a mortgage, deed of trust, or lien on property as collateral for a loan.  The most common types of secured debts are home mortgages and car loans.  The treatment of secured debts after bankruptcy can be confusing.

Bankruptcy cancels your personal legal obligation to pay a debt, even a secured debt.  This means the secured creditor can’t sue you after a bankruptcy to collect the money you owe.

But, and this is a big “but,” the creditor can still take back their collateral if you don’t pay the debt.  For example, if you are behind on a car loan or home mortgage, the creditor can ask the bankruptcy court for permission to repossess your car or foreclose on your home.  Or the creditor can just wait until your bankruptcy is over and then do so.  Although a secured creditor can’t sue you if you don’t pay, that creditor can usually take back the collateral.

For this reason, if you want to keep property that is collateral for a secured debt, you will need to catch up on the payments and continue to make them during and after bankruptcy, keep any required insurance, and you may have to reaffirm the loan.

No.  Many people believe they can not own anything for a period of time after filing for bankruptcy.  This is not true.  You can keep your exempt property and anything you obtain after the bankruptcy is filed.  However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.

In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt.  Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13.

However, some of your creditors may have a “security interest” in your home, automobile, or other personal property.  This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt.  Bankruptcy does not make these security interests go away.  If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.

In a chapter 13 case, you may be able to keep certain secured property by paying the creditor the value of the property rather than the full amount owed on the debt.  Or you can use chapter 13 to catch up on back payments and get current on the loan.

There are also several ways that you can keep collateral or mortgaged property after you file a chapter 7 bankruptcy.  You can agree to keep making your payments on the debt until it is paid in full.  Or you can pay the creditor the amount that the property you want to keep is worth.  In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt.  If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.

In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors.  It is important to check the exemptions that are available in the state where you live.  (If you moved to your current state from a different state within two years before your bankruptcy filing, you may be required to use the exemptions from the state where you lived just before the two-year period.)  In some states, you are given a choice when you file bankruptcy between using either the state exemptions or using the federal bankruptcy exemptions.  If your state has “opted” out of the federal bankruptcy exemptions, you will be required to chose exemptions mostly under your state law.  However, even in an “opt-out” state, you may use a special federal bankruptcy exemption that protects retirement funds in pension plans and individual retirement accounts (IRAs).

If you are allowed to use the federal bankruptcy exemptions, as of the date of this posting, they include:

• $20,200 in equity in your home;
• $3225 in equity in your car;
• $525 per item in any household goods up to a total of $10,775;
• $2,025 in things you need for your job (tools, books, etc.);
• $1075 in any property, plus part of the unused exemption in your home, up to $10,125;
• Your right to receive certain benefits such as Social Security, unemployment compensation, veteran’s benefits, public assistance, and pensions-regardless of the amount.

The amounts of the exemptions are doubled when a married couple files together.  Again, you may be required to use state exemptions which may be more or less generous than the federal exemptions.

In determining whether property is exempt, you must keep a few things in mind.  The value of property is not the amount you paid for it, but what it is worth when your bankruptcy case is filed.  Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement.

You also only need to look at your equity in property.  That means you count your exemptions against the full value minus any money that you owe on mortgages or liens.  For example, if you own a $50,000 house with a $40,000 mortgage, you have only $10,000 in equity.  You can fully protect the $50,000 home with a $10,000 exemption.

While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind.  In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law.  In most cases you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.