Chapter 7 Versus Chapter 13

When you file for bankruptcy, your property is no longer your own, at least temporarily. The court more or less “owns” all of your property, including boats, RVs, and recreational vehicles. It only lets you keep what you are entitled to when your case is over. Which chapter of bankruptcy you file has a lot to do with what you can keep. Also, each state sets its own bankruptcy exemptions, which are rules that allow specific types of property to be protected in bankruptcy. Some states allow you to keep more property than others. It all depends on where you file your case.

Chapter 7 Versus Chapter 13

Simply put, Chapter 13 bankruptcy allows you to keep virtually all of your property, while Chapter 7 only allows you to keep property that is exempt in your state. However, the down side to being able to keep your property is that in a Chapter 13, you will have to pay a monthly payment plan to the court lasting from three to five years. When the plan is finally over, you will have paid off a significant percentage of the debt you owed when you filed your bankruptcy.

The advantage to a Chapter 7 bankruptcy is, as soon as you file, virtually all of your unsecured debt is completely eliminated.  Most people prefer to completely eliminate their unsecured debt through Chapter 7, rather than pay back a portion of it over several years through a Chapter 13.

In the case of an RV, a boat, or other such recreational vehicle, if you want to keep it when you file for bankruptcy, you likely will have to file a Chapter 13 bankruptcy. However, it is important to weigh how much your payment plan is going to cost over three to five years versus the value of what you want to keep. It might not be worth filing a Chapter 13 if you are going to have to pay back a lot of your creditors, just to keep a boat that isn’t worth that much to begin with.

You may be able to sell a boat or an RV before filing bankruptcy and use the money to pay your attorney’s fees, catch up on a mortgage, etc., and then file a Chapter 7 instead of a 13. In this way, your unsecured debt will be eliminated, you will have no payment plan whatsoever, and you can always save up your money after filing for bankruptcy to buy a new boat, RV, etc.

Bankruptcy Exemptions

Under a Chapter 7, bankruptcy exemptions will allow you to protect certain property. Usually your personal residence and your car or truck can be protected under an exemption, depending on which state you live in. However, no matter how lenient a state’s bankruptcy exemptions are, it is unusual to be able to protect something like a boat, RV, or recreational vehicle under an exemption, unless special circumstances exist. For example, a boat might be the way you get to and from your job. In this scenario, you might be able to protect it under a bankruptcy exemption. It is best to discuss your state’s exemptions with an experienced bankruptcy attorney to determine what property can be protected.

Equity Issues

What if your RV, boat, or other recreational vehicle has no equity? In a situation where you owe more on the property than it is worth, you will likely be able to keep it even if you file Chapter 7 bankruptcy. Here’s why.

One of the jobs of the Chapter 7 Trustee is to liquidate any assets you have that aren’t protected by an exemption and divide the money he makes among your creditors. Let’s say you have a boat that is worth $5,000 and it is paid off. When you file for bankruptcy, it is not protected. The trustee will auction off the boat and divide the $5,000 he makes among your creditors.

In another scenario, this time the $5,000 boat has a loan on it for $7,000. You are up-side-down on the loan. If you file for bankruptcy, the trustee is not going to try and auction off the boat, because he cannot make any money off of the sale since he will have to pay off the loan before dividing the money among your creditors. So if your property is up-side-down, and you do want to keep it, you can safely file for Chapter 7 bankruptcy because the property has no value to the trustee.