When you file for bankruptcy protection, you surrender control of your assets to the trustee. Your property becomes your “bankruptcy estate.” This isn’t necessarily a bad thing if you file for Chapter 13, but if you file for Chapter 7, the trustee can sell assets from your bankruptcy estate to raise money to pay your creditors. You can prevent this by using exemptions to protect certain assets.
Chapter 7 Exemptions Save Property
The federal code offers a list of bankruptcy exemptions, and individual states have their own lists as well. You can’t mix and match between your state’s list and the federal list. You must select one or the other if your state gives you this option. Some require that you use their own lists. Exemptions address specific items of property and are for a set dollar amount. For example, your state might offer a $3,000 automobile exemption and a $15,000 homestead exemption that you can use to protect equity in your house. The federal list and some offer an extra bonus: a “wildcard” exemption that you can apply to any property you want to protect.
Trustee May “Abandon” Property
You might get lucky even if your available exemptions aren’t quite enough to cover an asset you want to keep. If your car is worth $15,000, but you still owe $11,000 on the loan and the automobile exemption is $3,000, this leaves $1,000 in unprotected equity. Technically, the trustee could take your car, sell it, pay off your $11,000 loan, give you $3,000 in cash for the exemption and apportion the remaining $1,000 among your creditors. But there will probably be costs of sale that will whittle away at that $1,000, so he might only be able to raise $800 or so for your creditors. Trustees sometimes decide that liquidating an asset isn’t worth the time and effort involved because creditors will receive only negligible payment. They’ll abandon the property. If you receive a notice of abandonment for any asset, don’t panic -- this is a good thing. It means the asset in question is yours to keep. It’s removed from your bankruptcy estate.
Chapter 13 Requires a Payment Plan
Chapter 13 is a completely different bankruptcy process from Chapter 7. The trustee doesn’t sell your assets because you agree to repay your debts over several years in a plan approved by the court. You’ll give the trustee a specified amount of money that is determined by what you have left over at the end of the month after paying your necessary living expenses. He’ll then use this money to pay your creditors. If you have assets you want to protect and think you have sufficient disposable income to qualify, talk to a lawyer to find out if filing Chapter 13 is an option for you.
Trustee Can Search for "Hidden" Assets
The worst thing you can possibly do is try to hide assets from the trustee. In all likelihood, he’ll find them because you must turn in copious paperwork when you file for bankruptcy, including tax returns. There may be some trace of the hidden assets in these documents. The bankruptcy code gives trustees a great deal of power when it comes to tracking down items of property you’ve transferred to someone else and bringing them back into your bankruptcy estate. The court can also deny you a discharge of your debts.