Bankruptcy and Your Possessions
A big worry for people considering bankruptcy is what will happen to their possessions. Most people who file bankruptcy do not lose any property in the case. If they are making payments on a house or a car, they can keep that property if they can continue to make the payments. Property that is paid in full is usually exempt from being taken in a bankruptcy. The idea is to give the typical debtor a fresh start by allowing them to keep the property necessary to go forward after debt is eliminated.
The protections for property in bankruptcy are called exemptions. In Washington, debtors can choose state or federal exemptions to protect property. However, you can not choose to protect some property with state exemptions and some with federal exemptions – you must choose either state or federal. State exemptions allow more protection for home equity – $125,00 – than federal. The federal exemptions allow a much higher “wildcard exemption” that can be applied to bank accounts or any other property – this can be as high as $11,975. Married couples who file can stack the exemptions on top of each other. The wildcard can be stacked on top of other kinds of exemptions, such as the car exemption, which is about $3500 for both state and federal. Retirement accounts are 100% exempt.
If a debtor wants to keep a house or a car in a Chapter 7, the creditor will want them to file a reaffirmation agreement. This agreement takes the debt outside the bankruptcy. If this agreement is not filed, the debt is discharged. So by signing and filing the reaffirmation, the risk of default is placed on the debtor. Car companies can repossess a car if it is not filed, though many will not do so as long as the payments are made. However, some car companies will repossess a car if there is no reaffirmation even if the payments are current. If you are making payments on an appliance, electronic device or other big ticket item, you can lower payments and debt with a reaffirmation. Often you can just keep the item, stop making payments and discharge the debt because it is not worth it for a creditor to try to get it back after the bankruptcy is over.
In a Chapter 13, mortgage payments and car payments are made inside the plan. If you have property that could be sold in a Chapter 7, a Chapter 13 allows you to pay the money a creditor would have received from the sale over time and still keep the property.
In general, there are many ways to keep important property and still get debt relief in a bankruptcy. If you are considering selling treasured items or cashing out a retirement plan just to make a dent in your debt, you should consider bankruptcy as the best way to get out of financial trouble and keep as much of your property as possible.