How Bankruptcy Treats Exempt Property

Bankruptcy is all about allocation of assets

Bankruptcy is all about allocation of assets. And, when you successfully file for bankruptcy, your assets are separated into exempt and non-exempt classifications. Exempt asset classifications are those that creditors cannot touch and, thus, you get to keep. Non-exempt categories are those that can be sold at auction or in other ways in an effort to raise money to pay off the creditors.

For a definition of what types of properties and assets are exempt and which are not exempt, you will have to look at your state laws, as each state, in large part, sets its own rules. For example, in nearly all cases, the primary residence of the homeowner is considered to be exempt and out of the reach of creditors. Second homes or vacation homes, however, are usually considered non-exempt and can be sold or auctioned off.

Once you turn in your bankruptcy filing papers, a bankruptcy trustee will be assigned to you. He will be in charge of liquidating all of your non-exempt properties. Because he is compensated based on a percentage of the money that he gets from selling your assets, he has a particular interest in them. When items are sold the proceeds are given to the court. The court then returns the money to the trustee for distribution among the creditors. In the process he will take out his cut which is usually a decreasing sliding scale based on the dollar amount of the merchandise sold.

Now, in a lot of bankruptcy cases, the filing paperwork will indicate that the person really has no items or property of value. In this case, the trustee has no interest in trying to sell the stuff because it would just be time wasted on his part.

For most people this means that they will actually get to keep most of the housing assets like furniture sets, bookcases, and so on. That's because it would cost the trustee far more of his time and money to sell them than would be worthwhile. These types of cases are usually referred to as no-asset cases, because no assets of value are held by the debtor. In a no-asset case, don't be surprised if you meet the trustee only once and never hear from him again.

On the other hand, if you have properties such as late model cars, which can easily be sold on the open market, you will most likely lose those.

Some people, in an effort to save some of their assets, will hide property or valuables in order to prevent them from being sold or auctioned off. But, this is the worst thing you can do. If any evidence of fraud is discovered, not only might your bankruptcy filing be disrupted, you will be guilty of a criminal offense as well and possibly have to face jail time.

How Bankruptcy Treats Exempt Property

By: David Hoyer

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