One of the most common concerns people have before they file for bankruptcy protection is the possibility of losing their home or other important assets. People often fear losing their retirement accounts, their car(s) or their savings for a child's college education.
However, people file bankruptcy to get a fresh start and put them on the road to financial recovery - a goal best accomplished by allowing individuals to keep property to live a functional, normal life. As a result, many assets are protected during the bankruptcy process, and by speaking with an experienced bankruptcy attorney, individuals and businesses can plan to save non-protected assets as well.
Chapter 7 and Chapter 13 Bankruptcy
According to the U.S. Bankruptcy Court, the two most common forms of bankruptcy are Chapter 7 (1.5 million filings in 2010) and Chapter 13 (420,000 filings in 2010). During a Chapter 7 bankruptcy, debtors in California use state property exemptions to protect certain assets from creditors. For example, people can typically protect the following types of assets during a bankruptcy:
- Pensions, 401(k) accounts and other retirement savings
- Social Security or unemployment compensation
- Cars, checking and savings accounts, and tools needed for one's profession (all up to certain limits)
- Limited amounts of home equity
Given these exemptions, it is possible to plan ahead and shield certain assets from creditors during a bankruptcy. For example, if you are going to file for bankruptcy, an experienced bankruptcy attorney can evaluate your different assets and give you reassurance that those assets will be protected during the bankruptcy process.
For this reason, it is important to speak with a qualified bankruptcy attorney before considering transferring assets prior to a bankruptcy. A bankruptcy court may look at transfers that occurred shortly before a bankruptcy filing and evaluate whether those transfers were made to defraud creditors. If so, then the bankruptcy trustee may attempt to claw back those transfers and return them to the bankruptcy estate.
Finally, some individuals will qualify for Chapter 13 bankruptcy. Unlike Chapter 7, a Chapter 13 debtor does not liquidate their property to repay his or her creditors, but rather establishes a three-year to five-year repayment plan. Debtors must show they have enough disposable income to abide by this plan, but upon completion of the plan, all of the remaining dischargeable debt is eliminated and the debtor is allowed to keep their property.
Anyone considering bankruptcy should speak with an experienced bankruptcy lawyer immediately to discuss options for protecting their property, as well as their eligibility for either Chapter 7 or Chapter 13 bankruptcy.
