The United States Constitution gives you the ability to eliminate your debts when your financial obligations become too much to bear. Depending on your situation, you can seek financial relief under these two types of personal bankruptcy: Chapter 7 and Chapter 13. Both options allow you to keep your property but with certain conditions.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy provides financial relief by eliminating all or a portion of your debts. Most types of unsecured debt (such as credit card and medical bills) are discharged in Chapter 7. In a Chapter 7 bankruptcy case, the court treats your assets as potential means of repaying your debts. When you file for bankruptcy, all your assets become part of the bankruptcy estate.
Exempt and Nonexempt Assets
There are certain types of assets that are exempt from being sold to pay back your creditors, while some types of assets are not exempt. The assets that can be sold are referred to as nonexempt assets. The bankruptcy trustee is going to sell a nonexempt property with significant value.
Assets that you have to give up include:
- A second house
- A second vehicle
- Heirlooms
- Cash and investments
- Valuable collections
Assets that you can keep include:
- Pensions
- A portion of home equity
- Vehicles up to a certain amount
- Household appliances
Many individuals who filed for Chapter 7 bankruptcy are able to retain possession of all or most of their assets. But those who own substantial equity or assets that are nonexempt could lose them to pay back creditors.
When you complete the Chapter 7 bankruptcy all your debts are discharged with the exemption of non-dischargeable debts, such as student loans and child support.
Chapter 13 Bankruptcy
You can protect your secured assets from creditors and bankruptcy trustee in Chapter 13 bankruptcy. However, you will have to continue paying your secured debts and pay off arrears.
Chapter 13 bankruptcy prevents creditors from taking away your property to pay your obligations to them. But if you own assets that are considered as nonexempt, you will likely be required to repay a bigger amount of your unsecured debts under a repayment plan in Chapter 13 bankruptcy. Moreover, you can only keep your assets if you keep up with your secured debt payments or pay all of them in your plan.
Even Nonexempt Assets are Protected in Chapter 13 Bankruptcy
Your nonexempt assets are not used to pay your creditors in Chapter 13 bankruptcy. On the contrary, the Chapter 7 bankruptcy trustee will liquidate your nonexempt assets. In exchange for allowing you to retain possession of all your assets, you repay all or some of your obligations through a court-approved repayment plan.
Your Assets Affect How Much Debt You Should Repay
Some of your debts will have to be paid in full in your Chapter repayment plan. Examples of these are unpaid mortgage and certain types of taxes. But the exact amount of unsecured debts (like credit cards and medical bills) to be paid depends on your nonexempt assets, expenses and income. Nevertheless, that amount is often much less than your outstanding balance.
You Can Catch Up on Unpaid Secured Payments and Keep the Secured Property
If you used a certain asset as security for a loan, you have a secured debt. And if you miss payments on your secured loan, your lender can repossess or foreclosure that property. Examples of secured debts are car loan and home mortgage.
Chapter 13 bankruptcy can stop foreclosure or repossession of your secured property and allow you to pay your arrears through an affordable repayment plan. As you catch up on your payments, the automatic stay blocks creditors from taking away your property.
You Have to Keep Up with Your Secured Debt Payments
To keep your property, you must also pay your the ongoing payables on your secured debts. Your unpaid mortgage bills have to be paid off through your repayment plan in Chapter 13 bankruptcy. But regardless if you have arrears, you must continue paying your regular payments. If not, your mortgage lender will seek to remove the automatic stay on your debt and proceed with the foreclosure process if allowed by a bankruptcy judge.
In contrast to a mortgage debt, you may have an option to pay off your other secured debts through your repayment plan.
Whether or not you exclude your secured personal property in your Chapter 13 filing, you need to make sure that you pay your lender on time. Otherwise, you risk losing that property. The lender could repossess or ask the court to lift the automatic stay on that property.
At the end of your Chapter 13 bankruptcy, the court will discharge most of your debts.
Ask Help from a Legal Expert
Filing for bankruptcy is a very important decision. A skilled bankruptcy attorney can help you explore your options and create a viable game plan to protect and retain your assets in a bankruptcy case.