Debtors' houses are among possessions often protected in bankruptcy
Many people shy away from filing bankruptcy because they believe they'll lose everything in the process. The truth is that the state and federal exemptions provided in the U.S. Bankruptcy Code generally cover major assets such as a house, car and personal belongings.
The vast number of cases are personal bankruptcies under Chapter 7, which usually involves debtors who have few or no non-exempt assets that a trustee can sell to pay their bills.
Higher-income people who file under Chapter 13, called the "wage earner's" bankruptcy, debunk the myth that debtors must be "flat broke" in order to petition the U.S. Bankruptcy Court. Those in Chapter 13 cases often have their property protected from seizure for several years while they pay back their creditors through a court-ordered repayment plan.
Valuations vary from state to state, according to cost of living, median income and other factors that determine a fair value for property in a given locale. Federal exemptions often are used if a state exemption doesn't apply or will not provide the same amount of protection, although only 17 jurisdictions nationwide allow debtors to choose between the two. Determining which option offers debtors the greatest protection is based on how the value of their assets measure against state and federal limits.
There are cases in which debtors may own a home or other possessions that have a value higher than the exemptions allowed by either their state or the federal bankruptcy code.
According to Bankruptcy Home, the debtor may have to sell the property since the court won't discharge secured debts, which are those linked to tangible possessions. Sometimes in a Chapter 7 case, people are allowed to keep non-exempt items if the trustee overseeing the bankruptcy action is convinced they are able to afford it.
In both Chapter 7 and Chapter 13 actions, creditors cannot take possessions to pay off what is owed to them on unsecured debts, such as credit cards or medical bills. During bankruptcy, any collection efforts or lawsuits are stopped by an automatic stay. If the court approves the petition, all unsecured debt is discharged and creditors cannot recoup their losses.
In addition, intangible assets such as pension plans and IRAs are largely exempt as are government benefits such as social security. However, debtors are prohibited from drawing out large amounts or making significant payments into their plans just prior to filing bankruptcy.
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