Answer: A person who files for bankruptcy may exempt certain items from the bankruptcy. In most cases, this lets you keep your home, your car, your furniture, your household items, your retirement and most, if not all, of what you have. Different states have different allowances for exemptions. You also can keep assets that have no equity, such as a car that's worth less than is owed on it, or a house where the mortgage is higher than the property value. Even if there is a small amount of equity, you can normally keep the asset.
While bankruptcy is a federal law, it is generally left for each state to decide what property that a debtor can keep after filing a Chapter 7 bankruptcy. California homeowners filing for Chapter 7 bankruptcy can protect (or exempt) anywhere from $50,000 to $150,000 of their equity depending on a number of factors that include age, marital status and the length of time they have owned the home. If the equity in the debtor's home is less than the allowed exemption amount, the debtor can keep the house simply by continuing to make the mortgage payments.
If the debtor's equity in the particular asset exceeds the allowed exemption, the property is called "nonexempt" and subject to possible liquidation (sale) by the appointed Chapter 7 trustee. Whether the trustee actually sells the asset depends on how much money the sale might generate. If the asset will not generate sufficient net proceeds to justify the sale, the trustee will often "abandon" the asset and ownership will revert back to the debtor. In other cases, the debtor can negotiate with the trustee to buy the asset back by paying the trustee the an amount equal to the nonexempt equity in the property.
Exemption planning and determining what assets you can keep after a bankruptcy are among the primary jobs of a bankruptcy attorney. You should consult a local bankruptcy attorney for further assistance.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.