Do I Have to Give Up Things That I Own Outright When I File Bankruptcy?

Bankruptcy can be an intimidating process because of the uncertainty and complexity involved in turning over your debts to a bankruptcy court to help you get a fresh start. Depending on the type of bankruptcy you file, your assets may be sold – or liquidated – to pay your creditors, or your assets may be safe because you are paying on your debts. Even when your assets are subject to liquidation, some of your things may be exempt from sale based on state or federal law.

Chapter 13 bankruptcy is a reorganization plan rather than a liquidation plan. Under Chapter 13, you create a debt repayment plan, managed by a bankruptcy trustee, based on your monthly income. Since the idea behind Chapter 13 is that the debts are being repaid over three to five years in accordance with the repayment plan, your assets do not have to be involuntarily sold.

Read More: Chapter 13 Bankruptcy Explained

Unlike Chapter 13 bankruptcy, Chapter 7 is a liquidation process whereby certain assets are sold to pay your debts. If you qualify for Chapter 7 bankruptcy, assets you own outright may be sold to raise money for distribution to your creditors. The bankruptcy trustee will take possession of certain assets -- called "nonexempt assets" -- and sell them, then distribute the proceeds to your creditors. However, in the majority of Chapter 7 cases, the debtor has no nonexempt property available to be sold.

Some types of property are exempt from sale in a Chapter 7 bankruptcy, either by state or federal law, meaning you get to keep them. Depending on where you live, you may get to choose between federal or state exemptions, but many states require you to use the state exemptions. For example, in Arizona, your home is exempt up to $150,000 and your personal property, such as household furnishings, may be exempt up to $4,000 for individuals and $8,000 for married couples. Other items, such as wedding rings, books and burial plots may be exempt.

However, exemptions usually have a maximum amount, meaning that the item may be sold if its value exceeds the maximum exemption value. For example, if your home is exempt up to $150,000 but you own the home outright and its value is $250,000, the bankruptcy trustee may still sell your home because its value exceeds the maximum exemption.

In a Chapter 7 bankruptcy, the trustee may also "abandon" property, meaning he chooses not to sell it. The trustee often abandons property if he determines that the property is either burdensome to the bankruptcy estate or that it is of inconsequential value to the estate. So, things that you own outright that have little resale value may be safe from liquidation because the trustee may decide it's not worth the time and effort to sell them.