One of the questions people ask me all the time is, "Why would the Bankruptcy Court take my stuff when I file for bankruptcy? I don't have a job and I need my car to find a job and I need my other stuff to live. Will I be able to keep it?" Unfortunately, the reason people can keep some things and must give up other things has little to do with their specific needs or sentimental value.
Consider this: super spy James Bond won an Aston Martin DB5 in a poker game and left it to his son. The son died and left the vehicle to his son (James Bond's grandson) George Bond. Because of the economy, some bad investments and some medical bills, George Bond needs to file bankruptcy. He has almost no savings and no property because he used or sold everything he could to try to keep up with his bills. Although the DB5 is now only worth $25,000, George refused to sell it because it belonged to his grandfather and because it is the only way for him to get to work. Does George get to keep the DB5?
Unfortunately, the answer is not a simple "yes" or "no". Whether he gets to keep the car mostly depends on:
* the type of bankruptcy he files
* the "real" value of the car - $25,000 is just George's estimate
* the law in the State where George lives
* what else George still owns and its value
* the type of debt George has (secured or unsecured)
George's priorities may matter - keeping the car may be more important to George than, say, keeping his wife's engagement ring, but all of these issues need to be considered. One thing is certain - George will not be allowed to keep the car simply because it was his grandfather's car.
The Bankruptcy Code has a list of property (stuff) which people get to keep when they file bankruptcy. Most States, like California, have chosen to replace this "federal" list with a list of their own - a "State list". (California actually has 2 lists to choose from). So what someone gets to keep depends on where they live and the specific laws in that State.
Some States have laws which are more generous than others. Some States allow people to keep more expensive homes, others more expensive cars and other things. Some States protect bank account balances, others do not. In almost every State, the value of what you can keep is limited, usually by category or type of property. In California, for example, the car limit is $5,100. A few types of property, like pension plans, have special protection and are not limited by amount. To make things even more complicated, these limits change from time to time and apply differently for people who have moved to a new State in the last few years.
Property which does not fit into a category or have special protection can, under some State laws, still be protected because those States allow you to keep "any property" which has a limited combined value set by the law. In California, that limit is now $29,925, but this is only available if you do not own a home, have a home with no equity or choose not to protect the equity in your home.
Let's go back to George. In addition to the car worth $25,000, he has a stereo system worth $5,000; a show dog worth $4,000; a semi-rare baseball card worth $1,100; and a stamp collection worth $1,000. His assets total $36,100.
Remember that in California, the protected car limit is $5,100. The Aston Martin has a value of $25,000 so only a part of the car value would be protected using this limit. The rest, $19,900, could possibly be protected by the "any property" limit but George also has $11,100 of other stuff he also wants to keep. So the total of stuff George wants to keep using the "any property" is $19,900 from the car and $11,100 of other stuff, or a total of $31,000. But the "any property" limit in California is $26,925 which means that George needs to make some tough decisions.
What happens to those things which are not protected depends on the type of bankruptcy case George decides to file. In Chapter 7, the trustee may take and sell the unprotected property and use the money to partially pay George's debts. George will then be able to walk away from whatever else is owed.
In Chapter 13 and Chapter 11, George would probably get to keep the unprotected property, but its value would have to be paid to his creditors over time. In a Chapter 13 bankruptcy, George would have between 3 and 5 years to make those payments. Chapter 11 would give him much more time, but creates other problems to be described in the future.
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