When considering bankruptcy, the possibility of keeping your house and cars is a common concern. This depends on various factors like your state's bankruptcy exemptions, laws, and the equity in your assets. This guide explores how you can potentially retain your home and vehicles during bankruptcy. Understanding these factors can help you navigate the process of filing for bankruptcy without losing your house, ensuring you can keep your car through monthly payments and court decisions.
If you file for bankruptcy, you still have an opportunity to keep your house and vehicles. Whether this will be possible depends on four factors:
- How much equity do you have in the property you are attempting to keep.
- Whether your equity in the property exceeds the bankruptcy exemption for that type of property.
- If you have a loan secured by the property, whether the bank will agree to reaffirm the loan despite the bankruptcy.
- Whether you can afford to continue to make your loan payments after the bankruptcy.
How much equity do you own in the property you are trying to keep?
First, you must determine how much equity you own in the property you hope to retain. Equity is determined by subtracting the balance of any mortgages or other loans secured by the property from the value of the property. For example, if your house is worth $100,000.00, and you have a balance of $75,000.00 on your mortgage, then you have $25,000.00 of equity in your house.
Does your equity in the property exceed the bankruptcy exemption for that type of property?
Second, determine whether your equity in the property in question is greater than or less than your state’s bankruptcy exemption for such property. Federal and state statutes provide that certain types of property are exempt from inclusion in the bankruptcy estate, up to a particular monetary value. This means that if your ownership interest (equity) in a piece of property is less than the statutory exemption amount, the trustee cannot sell such property for the benefit of your creditors. For example, the Illinois exemption for residences is $15,000.00. So, if you have less than $15,000.00 of equity in your residence, the trustee cannot sell your residence for the benefit of your creditors.
Illinois has a $2,400.00 exemption for vehicles and a $4,000.00 “wildcard exemption” that can be applied to any personal property (meaning anything but real estate). So, if you use your wildcard exemption on your vehicle, you can keep your vehicle so long as you have less than $6,400.00 in equity in the vehicle. You should note that the vehicle and residence exemption amounts are doubled if you are filing jointly with your spouse and you and your spouse jointly own the property in question. In your analysis, you should also bear in mind that if your equity in a given piece of property is slightly more significant than the exemption amount for such property, you still may be able to keep the property because the trustee may decide that the monetary benefit to your creditors would be outweighed by the burden of taking possession of the property, selling it, and distributing the proceeds. So, the bottom line is that if you have less equity in a particular piece of property than the statutory exemption amount for that type of property, or if it is close, the trustee will not seize the property and sell it for the benefit of your creditors.
If you have a loan secured by the property, will the bank agree to a reaffirmation agreement?
If you own the property in question free and clear, then Step 2 should be the end of your analysis. Usually, however, properties such as residences and vehicles are secured by a loan. If you want to retain the property in question, you must reaffirm the loan. This is accomplished by executing a contract with the bank that holds the loan, called a reaffirmation agreement, whereby you and the bank both agree that the loan will not be wiped away in bankruptcy with the rest of your debt. After your bankruptcy, you will still have the debt represented by the loan and still be required to make payments as you were before the bankruptcy.
If you do not execute a reaffirmation agreement and file it with the court, you will no longer be responsible for the loan, but the bank will have the right to collect the property secured by the loan (i.e., you won’t have to make your mortgage payments or be responsible for the mortgage balance, but the bank can take your house). Banks are almost universally willing to execute reaffirmation agreements.
Will you be able to afford to make the loan payments after the bankruptcy?
When you file your reaffirmation agreement with the court, you will have to determine whether the assumption of the loan creates a presumption of undue hardship. This is done by subtracting your monthly expenses, including the loan payments, from your monthly income.
If you do not have enough monthly income to pay for your monthly expenses (including the loan payments), then the court will presume that reaffirming the loan creates a hardship for you. If this is the case, you will have to appear in court and explain to the judge how you expect to be able to make monthly loan payments after bankruptcy. The judge will then determine whether to allow the reaffirmation agreement.
If there is no presumption of undue hardship or if the judge allows the reaffirmation agreement despite the presumption of undue hardship, you will be able to keep the property after your bankruptcy.
Alternatives to Losing Assets in Bankruptcy
Bankruptcy filing doesn’t necessarily imply that your assets are bound for liquidation. There are alternative routes on the map that may lead to asset retention. For instance, selling high-equity assets voluntarily before you file bankruptcy could provide a cash reserve to pay off debts or diminish the bankruptcy estate subject to liquidation. If you’re faced with the prospect of losing your vehicle in Chapter 7, surrendering it to the creditor voluntarily can be an escape hatch, freeing you from the deficiency balance and its financial strain. These strategic maneuvers require careful consideration and timing, as they can impact the overall efficacy of your bankruptcy filing.
Selling Assets Voluntarily
Sometimes, it’s prudent to divest certain assets before they become entangled in the bankruptcy process. Liquidating nonexempt assets that carry substantial equity can avert their seizure by a bankruptcy trustee. Yet, disposing of high-end items that aren’t necessary for everyday life or work may provoke legal issues if not managed properly.
Conversely, retaining properties that generate income, such as rental homes, might prove beneficial by providing consistent revenue that helps with fiscal rehabilitation after bankruptcy. Deciding to sell or retain should be guided by your overarching financial aspirations and circumstances.
Negotiating with Creditors
A less traveled but often fruitful path is the road to negotiation with creditors. By renegotiating the terms of your debts, you might secure lower payments, longer repayment periods, or even agree on a lump sum payment that’s less burdensome. Creditors facing the prospect of receiving little to nothing in bankruptcy may be more amenable to a deal that ensures they recoup a portion of the owed amount.
Unsecured debts, like those from credit cards, are particularly negotiable since these creditors stand to lose the most in a bankruptcy filing. It’s a delicate dance, though, and creditors are likely to be more receptive if they understand that you’re grappling with the possibility of bankruptcy. Proactive and transparent communication is key to successful negotiations, as is keeping creditors informed of your unsecured debt and financial reality.
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