Will you lose all your property if you file bankruptcy? NO! You will most likely get to keep most if not all your property. When someone files bankruptcy, they can keep certain “exempt” property. In a chapter 7 case, the amount of property is limited yet includes many large assets such as a persons home, some equity in their car if fully owned and their qualified retirement account.

A Chapter 13 bankruptcy is a re-organization and the amount of property that can be kept is broader. A significant difference between a Chapter 7 and the Chapter 13 limitations as to how much property someone can keep is most significant to the self-employed. In the Chapter 7, the value of the stock or worth of the company must be surrendered to the Trustee, or bought back, once the exemption limitation is exceeded. In a Chapter 13, since it is a re-organization, there is surrender of the value that exceeds exempt amounts but is repurchased from the trustee at the fair value of the stock or liquidation value which is significantly lower than ongoing profit potential of the business. The business can then operate as it normally would and any buy back can be put in the plan.

This does not mean that all property can be kept. The Trustee would likely object to someone trying to keep “luxury” items. These items include timeshares, extra vehicles not needed for the business, motorcycles, watercraft – can’t keep that yacht and non-homestead land or buildings.  There is one important distinction when looking at buildings other than a person’s homestead which is when these buildings or land are leased. The Trustee looks upon these as a business, producing income that would help support the plan. They are, therefore, exempt. However vacant land or second investment properties would have to be forfeited. Proper planning prior to filing a bankruptcy can save these properties. Unfortunately, while in the Chapter 13 plan period, you will also forfeit your tax refund except that portion that is earned income credit.

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Many clients ask me if they will lose everything when they file bankruptcy. The answer is a resounding NO! It is likely that they will keep most, if not all of their property.  Florida has exemptions which is property that is not included in the bankruptcy estate.  The debtor who files bankruptcy can keep this exempt property.

Chapter 7 is a “liquidation” bankruptcy.  Debtors are eliminating all their unsecured debt – debts usually comprised of credit cards, medical bills or judgments not based on intentional acts.  They may choose to walk away from secured assets as well.  Secured assets are any property that is protected by some form of agreement that keeps ownership of the property in the creditor until it is paid for.  Homes, leased or financed vehicles or even expensive TVs and the like are examples of secured assets.  These assets can be forfeited in bankruptcy and the debtor is relieved of any deficiency or liability on the debt.

In exchange for this “liquidation”, debtors can only keep a certain limited amount of property.  Florida allows $1000.00 dollars applied to any personal property of each debtor filing; $1000,00 dollars of equity in one vehicle titled in each debtor; their home, if it is current in it’s payments or $4000.00 dollars in additional exemption applied to any property the debtor wishes if they do not keep their home.  Their qualified retirement funds are exempt as well and client’s are cautioned never to touch these funds for any reason.  Death benefits, annuity contracts, disability benefits and life insurance cash values are also exempt.  Exemptions exist for Alimony and child support as well as crime victims funds, public assistance and social security.

For the self employed, unfortunately, tools of the trade are not exempt nor is the value of their company.  The business has value and the Trustee will likely seize the value of the stock or what the company is worth if that value exceeds the exemption limits.  For those businesses that have significant value, debtors can turn to Chapter 13 for relief as that bankruptcy is a re-organization and debtors are allowed to continue their normal business activities, thereby keeping business assets.

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