When I File Chapter 7 Bankruptcy, what Property can I Keep?

Property that is Exempt

Exemptions are special bankruptcy rules set forth by each state that allow you to keep certain property when you file for Chapter 7 bankruptcy. Typically, there are restrictions on the maximum value of exempt property that you are allowed to keep.

For example, in most states you can protect your car, but only if it is worth less than a specific dollar amount of equity. This dollar amount varies depending on your state’s exemption laws. If your vehicle is worth $10,000 and you owe $5,000 on the loan, then it has $5,000 in equity. As long as your state’s bankruptcy exemptions allow you to keep a vehicle worth $5,000 or less in equity when you file a Chapter 7 bankruptcy, then your car will be protected when you file.

Because each state is different, you should consult an experienced bankruptcy attorney in your state to discuss the exemption laws. Common exempt property typically includes…

  • Your personal vehicle (usually two vehicles if you are married)
  • The home in which you live
  • Miscellaneous personal property like…
    • Your pets
    • Books, magazines etc.
    • Common household appliances
    • Your clothes
    • Typical household furniture and furnishings
    • Wedding rings, watches, and some jewelry
  • Retirement accounts and pensions
  • Certain insurance policies
  • Equipment, machinery, and tools used for your business
  • A limited amount of cash on hand and money in a bank account

 Property that is Secured by Lien or Collateral

If your property is secured by collateral or lien, it is a secured debt. When you file for Chapter 7 bankruptcy, you can typically keep your cars and the home you live in if you continue to make your payments and keep them up-to-date. Sometimes your lender might require you to file a reaffirmation of your secured property in order to be allowed to keep it. Also, there may be cases where filing a reaffirmation or redemption (see below for details) will be financially beneficial for you.

Redemption of Property

When you redeem your property in a Chapter 7 bankruptcy, you are engaging in a special agreement with your lender that allows you to keep your vehicle while reducing your monthly payments and/or the amount owed on the vehicle. To qualify for a redemption, you must owe more on your car than its retail value.

A redemption can be thought of as a brand new contract on your car where you agree to keep making the monthly payments if the bank agrees to lower the amount you owe on the vehicle. The end result is typically a lower monthly payment or an early payoff date. For example, if you own a truck that is worth $20,000 but you owe $25,000, your bank agrees to a redemption where you only owe $20,000 on the vehicle. Your new monthly payment at a reduced amount would begin after your bankruptcy.

Although your new loan through the redemption will have a higher interest rate, there is no need to be alarmed. The new loan will be for a lower total amount, which will lower your monthly payment in spite of the higher interest rate.

The main downside to a redemption is that you will no longer have the protection of Chapter 7 bankruptcy on your car. If at some time in the future you decide you no longer want the vehicle and you return it to the bank, they can pursue you for what you still owe on it, minus any money they make when they auction the car off. Had you not redeemed the vehicle, your Chapter 7 bankruptcy protection would allow you to give the vehicle back to the bank for any reason, without owing a penny.

Reaffirmation Agreements

When you reaffirm your vehicle as part of your Chapter 7 bankruptcy, you are essentially agreeing to a brand new loan with your bank. The payment terms, interest rate, and duration typically remain the same, but the new loan will no longer provide bankruptcy protection for the vehicle. Without the bankruptcy protection, if you have to give your vehicle back to the bank at some time in the future, you will be on the hook for at least some of the money you owe.

Why would anyone want to lose their bankruptcy protection through a reaffirmation agreement? One advantage to a reaffirmation is that it is a useful way of restoring your tarnished credit after bankruptcy. If you do not reaffirm, the loan remains under the protection of your bankruptcy. As a result, any payment you make after filing does not show up on your credit and does not help your credit score. Some choose to reaffirm their loan for this purpose. Others are forced into reaffirming. It is your bank’s prerogative to require you to file a reaffirmation agreement if you want to keep your car. If your bank requires you to reaffirm, then you will have no choice if you want to keep your vehicle. However, because you filed for Chapter 7 bankruptcy, you can choose to not reaffirm the vehicle and instead return it to the bank, without owing any money.