Bankruptcy: Will I lose my car, home, and other belongings?
In a nutshell, the answer is, “It depends.” The two most common types of consumer bankruptcies are Chapter 7 and Chapter 13 bankruptcies. Of those two, the one you hear most about, and the topic of this article, is Chapter 7 bankruptcy (this article will also only discuss personal bankruptcies and not corporate or business bankruptcies).
Under Chapter 7, a person eliminates all of their debt (excluding certain debts that are not dischargeable), in exchange for (at least in theory) giving up certain assets categorized as “non-exempt.” Those non-exempt assets are then sold by a randomly selected bankruptcy trustee in order to pay back your unsecured creditors (credit card debts, medical debts, etc.).
When somebody files for bankruptcy, everything that person owns (cars, houses, boats, money in bank accounts, TV’s, computers, clothes, everything) becomes a part of what’s called “the bankruptcy estate.” It is the trustee’s job to administer the case and your estate. And by administering your estate, what the trustee is trying to do is sell your non-exempt assets to pay back your creditors.
The goal behind bankruptcy planning and hiring a competent bankruptcy lawyer is to protect your belongings as much as possible from the trustee—ideally so that the trustee won’t touch any of your things and you come out debt free without losing any of your assets.
So what are “non-exempt” assets? Non-exempt assets are those that you cannot protect under Florida Law. Basically, Florida has a list of available exemptions that help protect your assets. An exemption is an amount of money available to you by law that you can use to protect an asset. Each state has its own set of specific exemptions and some states rely on Federal exemptions. For this article however, I will only be discussing Florida exemptions.
Most people are familiar with Florida’s very famous unlimited “homestead exemption.” For the most part, no creditor can go after the home in which you live in (there are exceptions to this rule that fall outside the scope of this article). This means that even if your home is worth $10 million dollars, no creditor (including a bankruptcy trustee) can force you to sell the home you live in in order to pay your debts. Most other states throughout the country do not have unlimited homestead exemptions like Florida’s.
However, the catch to this very generous homestead exemption is that Florida’s other exemptions available to protect the rest of our assets are very weak. For example, Florida law will only protect up to $1,000 of equity in one single motor vehicle and a total of $1,000 to protect the rest of our personal belongings. This means that if your car is paid off (or mostly paid off for that matter) you can only protect $1,000 of its value. In other words, if your car is worth $6,000 and there is no loan on it, then $5,000 would be left unprotected and considered to be “non-exempt” by the trustee allowing him to sell your car. To make matters worse, this $1,000 exemption only helps you protect one car and cannot be applied to other vehicles in the event you own more than one.
As to the rest of your personal belongings (money in bank accounts, money owed to you, expected income tax refund, TV’s, furniture, computers, etc.,) you can technically only protect $1,000 of their combined value—this is an extremely low amount since the value of all your belongings usually far exceeds $1,000.
For those of you that don’t own a house—or the house you own is in foreclosure (a subject worth discussing with your attorney)—you can waive your homestead exemption and claim a wildcard exemption. If you choose to waive your homestead exemption and utilize the wildcard exemption, then Florida law gives you an additional $4,000 to freely apply to your other belongings.
Additionally, there are numerous other exemptions available under Florida law including, but not limited to, money in IRA and other qualified retirement or pension accounts, life insurance policies, and head of household wages that help protect those assets as well. It is of utmost importance to apply your exemptions appropriately in order to protect your assets from the trustee’s grasp. Remember, if an asset is non-exempt, the trustee has the right to sell it for the benefit of your creditors.
So how can a bankruptcy attorney help? Fortunately, for most people, bankruptcy is not something that needs to be filed immediately. There are numerous exceptions to this that deserve a detailed discussion with your attorney (e.g. if you’re about to get a raise, expect large amounts of money in the future, expect to acquire assets in the near future, etc.,), but for the most part, people are in little to no rush to file.
The relationship you establish with your attorney should focus on devising a sound bankruptcy plan or strategy to take effect prior to filing. Your attorney will know which assets of yours need protecting and which assets can be left “non-exempt” with little to no risk of loss. For example, a trustee will not realistically want to sell your clothes, old TV’s, computers, etc., because it would cost the trustee more money to hire a moving company to pick up these items, pay for storage costs, and pay for auction costs, than the return he would ultimately receive by selling the asset at a public auction.
Your bankruptcy attorney will also know how to apply your available exemptions in order to dissuade the trustee from trying to sell your other more valuable assets. Under certain situations when an emergency bankruptcy may be required (the subject of a future post) and your “non-exempt” assets are too high in value, making you “over-exempt,” your attorney will also assist you in negotiating with the trustee in order to “buy back” the assets you really want to keep (too lengthy a subject to fully cover in this article but a conversation that must be had with your attorney).
As far as planning goes, there are numerous strategies available to create exempt assets and limit your vulnerability as to your non-exempt assets in order to protect your belongings when you’re final ready to file for bankruptcy. Maybe you need to purchase a new car (or lease one—the trustee cannot sell a car that you do not own) and trade in the old one that’s paid off because the old car has been giving you motor trouble and the maintenance costs are getting too high? Or you might want to wait until you receive your tax refund in order to spend the money on necessary household living expenses prior to filing in order to maximize the value of your wild card exemption?
Just as importantly, your attorney will also discuss the numerous actions you definitely should not take prior to filing—those which could be viewed as fraudulent and deceitful. For example, deeding over your property, car, or boat to a friend or relative in order to protect the asset prior to filing bankruptcy may be considered a “fraudulent conveyance” by a bankruptcy trustee and judge. These actions can cause far more harm than good under bankruptcy laws and result in the denial of your discharge, the loss of the asset, or worse.
Bankruptcy laws are complex. Sometimes the job of a good attorney is to tell you that bankruptcy is not right for you based on your specific situation. Maybe Chapter 7 is not the relief you are looking for but Chapter 13 is. If you plan on filing or are considering the possibility, speak to an attorney. Almost every bankruptcy attorney offers a free consultation. Get in touch with one, or a few, and get the expert opinion you deserve.
The Law Office of Francisco Cieza, P.A., offers free bankruptcy consultations and personalized representation. An attorney will handle all aspects of your case—from start to finish—whom you will directly communicate with throughout the length of your bankruptcy case.