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The Loss Of Property During Chapter 7 Bankruptcy: What To Know

12 June 2023

Gabriel Freeman

In Chapter 7 bankruptcy, a debtor's non-exempt personal property may be sold by the bankruptcy trustee to help pay off creditors. However, it's important to note that federal and state laws provide exemptions that protect certain types and amounts of property from being liquidated in bankruptcy.

What Is Exempt Property?

Exempt property is typically protected and cannot be taken by the trustee to satisfy debts. Common examples of exempt property may include a portion of the equity in a primary residence, a vehicle up to a certain value, necessary clothing, household goods, tools of the trade, retirement accounts, and certain public benefits.

The specific exemptions and their dollar limits can vary significantly depending on the state in which the bankruptcy is filed. It's essential to consult with a bankruptcy attorney about the exemptions provided by your specific state to understand the extent of protection available for personal property.

Subject to Liquidation

Additionally, if a debtor's property exceeds the available exemptions or is not protected, it may be subject to liquidation by the trustee. The proceeds from the sale of non-exempt property will be distributed among creditors to satisfy the debts.

The Homestead Exemption

A homestead exemption protects a certain amount of equity in a debtor's primary residence from being liquidated to pay off creditors. Here is what else to know about this type of exemption:

• A homestead exemption is designed to safeguard a portion of the equity that a debtor has in their primary residence. Equity refers to the value of the home minus any outstanding mortgage or liens. The exemption allows the debtor to keep a certain amount of equity, ensuring that they can maintain a place to live and avoid becoming homeless.
• Some states have specific dollar limits, while others have a formula based on factors such as the value of the home and the filer's age or marital status. The dollar limits can range from a few thousand dollars to hundreds of thousands of dollars.
• To qualify for a homestead exemption, the property must be the debtor's primary residence. Investment properties or second homes may not be eligible for a homestead exemption.
• If the equity in the home exceeds the allowed homestead exemption limit, the bankruptcy trustee may liquidate or sell the property to satisfy creditors' claims. However, if the equity falls within the exemption limit, the debtor can typically keep the home.

To understand how personal property is treated in Chapter 7 bankruptcy, speak with a bankruptcy attorney.  

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