There needs to be an effort to dispel some of the damaging myths out there surrounding bankruptcy that do nothing but help to keep people stuck in a disastrous financial situation. One big piece of misinformation is that people think they will lose their property if they file bankruptcy.
This is not true. For most people, they will not have to give up any property they wish to keep. Bankruptcy's primary goal is to give people a fresh start, free from the burdens of their massive debts. This goal would be impossible to pursue if it required that people who cannot afford to pay their debts were forced to hand over all their property to the bankruptcy court.
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The Bankruptcy Code allows people to keep a certain amount of their property through the use of exemptions. How much you get to protect depends on which system you choose, state or federal. Each system is different and would be preferable depending on the circumstances of each case.
For instance, in the State of Washington, a person can choose the Washington Exemptions and protect more than $100,000 in equity in their home. The federal limit does not come close to approaching that level. For some reason, many people do not have this particular concern in the Washington and find the federal system perfectly good for their bankruptcy.
One exemption available to people under the federal system is one that allows people to protect $3,450 in value in an automobile. That number refers to the equity one may have in a car.
Many people have financed cars that lose value quickly and are worth less than what is owed. If your car is encumbered by a loan that is greater than the value of the car, then you have no need to claim this amount your exemptions. There is no equity in the car.
For example, a 2007 Ford Mustang has so many miles on it and is in such condition that the blue book value just happens to be $9,000. My client owes $12,000 on the car. The exemption amount of $3,450 does not need to be used since there is no equity in the car.
So long as you can afford to continue to make the payments or work out a deal with the lender in bankruptcy that allows you to afford the car, you will have the opportunity to keep it.
If the example is changed, however, and the client only owes $6,000 on a car worth $9,000, then the exemptions would be required to protect the car. The $3,000 in equity will be covered in full and the client will be able to keep the car if they choose.
If the equity is more than the $3,450 allowed and the client wishes to keep the car, an attorney should be consulted to ensure that proper exemption planning is done.
There is a wild-card exemption, for instance, that would allow the client to exempt more than the $3,450 on the car but in such a case.
It really only becomes problematic for people who have quite a bunch of valuable property. These people will have to plan their limited exemptions carefully in a way to maximize the clients' interests. These exemptions are not limitless.
Most people, however, tend to fall well within the parameters of the exemptions allowed. This is true because almost everyone does everything in their power to liquidate their assets, pay off their creditors and avoid bankruptcy.
That is why it is important to know that you don't lose all your property in bankruptcy. You don't have to unemployed or homeless to file bankruptcy. Often times, whether to file bankruptcy is a mathematical decision and the goal of your attorney should be to make certain your interests are protected as fully as possible so that bankruptcy can be a springboard used to jump start a new financial beginning.
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