Will I Lose Everything if I File a Chapter 7 Bankruptcy?

I was giving a talk yesterday to a group of professionals and was again surprised when someone asked me this question. The answer is: NO, you do NOT lose everything when you file Chapter 7 bankruptcy! It is true that when you file a Chapter 7, all of your assets become the property of the bankruptcy estate, which is controlled by a bankruptcy trustee.

However, each state has a list of things that you can protect from the claims of your creditors or your bankruptcy trustee. These things are EXEMPT from being seized, and hence are called EXEMPTIONS. The exemptions that apply to a specific case frequently depends upon a number of factors, such as which state that the bankrutpcy was filed in, the length of time the debtor resided in that state, the length of time the debtor owned the particular asset, the value of the asset and other such inquries. If you qualify for California exemptions in your bankruptcy, you must determine which set of exemptions best suit your needs. California is one of the few states that allows you to choose between two sets of exemptions. As a general rule, one set is more favorable to homeowners and the other is more favorable to renters, although a careful analysis of your situation may yield different results. But be careful: any of your assets that are not protected (non-exempt assets) can be seized by the bankruptcy trustee, sold and the money used to pay your debts! However, if you have non-exempt assets and instead file for Chapter 13, your assets would not be seized, but they would be included in the anlysis to determine how much of your debt you will have to repay out of your earnings over the life of your plan of reorganziation (which typically runs 3-5 years). In short don’t file bankruptcy alone. Sure it costs money to hire a lawyer but that lawyer may save you many times over in the long run!