What is Protected when Filing Bankruptcy?Last Revised on December 10, 2010
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Bankruptcy is usually the last option after all the attempts people make to pay off debts and still can’t succeed; often times the reason is income reduction or the job loss. It should be avoided if possible because it destroys your credit like nothing else, and takes away lots of things you own but not everything; that’s why it is called bankruptcy protection. The rules vary from state to state as they each regulate their own laws.
List of Things, Items or Assets Bankruptcy Protects
Your Family Home. If you use the property for primary residency, then most states lets you hold onto it. In Florida you can keep upto 160 acres, and Texan residents are protected upto 200 acres in rural areas and 10 acres in city proximity. Also if the mortgage balance is more than the worth of the house, the owner get to keep it as long as payments are made on time. Federal government has started a new program called Making Home Affordable; this is the best way to protect your assets under bankruptcy. Filing a Chapter 7 will completely eliminate all the unsecured creditors, and the home maybe protected from foreclosure as well. But chapter 13 provides you better protection when it comes to home, property and other assets; as you will see the main difference between chapter 7 and chapter 13 bankruptcy little bit later.
Personal Car. Just like your house, exemption of car from getting seized during bankruptcy will depend on the value of the car. If the car is worth less than what the owner owe and the payments can be made steadily, then the car can be protected. The state of Delaware and Nevada are the best states for exempting any vehicle for value about $15,000. Other states such as New Jersey and Connecticut the limit is about $3,450. The federal wild card to keep the car is nearly $12,000.
Your Retirement Funds. As you might know that a lot of retirement funds are exempted from tax. They are also protected from bankruptcy up to the amount of about $1.10 million per individuals. These retirement accounts include 401k, pensions, social security, disability benefits, veteran benefits from military services, some IRA accounts, etc. However, please refrain from transferring money from your investment and other accounts into a single retirement fund they are not protected under bankruptcy chapters. If you are caught doing that by panel of trustees, you risk losing money from your original retirement account after account getting frozen for many months to investigate.
Your Life Insurance Policy. Probably the safest thing from bankruptcy government take aways besides your retirement funds is the life insurance policy. Some state laws look at the policy as an investment and it can get tricky for the insurance holders how to take the next step. The state of Florida protects the entire insurance policy, whereas Ohio allows exemption only when the beneficiary is a dependent, after that the entire amount gets no protection at all. Life insurance contracts along with worker compensations are generally left untouched.
Education Saving Plans. It is also known as 529 plans, which is a state run investment plan to give families the opportunity to save money for college education, and it is also tax free. One of the newest bankruptcy asset protection law provides a first time clear protection for money in this plans. The protection is limited to amount less than $5,000 if the plan was started less than two years before bankruptcy declaration process. Usually the money is protected as long as the beneficiary isn’t the person who is filing for bankruptcy. Otherwise, the 529 money will be cashed out by the trustees to pay the creditors.
So what are the different types of protections offered by filing Chapter 7, 11, 12 and 13? Well, it is very simple when written like this:
In Chapter 7, all the non-exempt assets and property goes to bankruptcy trustee who solds them to liquidate them and proceeds goes to debtor’s unsecured creditors. This is for people who doesn’t have anything to lose – such as car or house. As long as the debtor isn’t charged with concealing any financial records, some of the debts will be discharged consequently. Most debts are forgiven, so your responsibility end right away after approval.
In Chapter 11,both the creditor and debtor work together. The bankruptcy filer retains ownership of his or her assets and is called DIP, a Debtor In Possession. He or she controls and run the daily operations of the business, and negotiates the payments while the court moderates. Chapter 12 is for farmers.
In Chapter 13, the debtors retains the right to personal assets as well. The difference is that the loan payment is postponed, considering the cost and expenses of living and running a business. Chapter 13 bankruptcy is for people who can recover if given a chance with sufficient time, as they make enough money to cover daily expenses but have little left to pay the creditors. This one doesn’t usually resolve within a year, it takes over 5 years. It protects you from direct action against you, while you remain obligated for repayment overseen by the court.
So back to what most people are asking: is my house protected under bankruptcy? Yes, your home property is often protected in bankruptcy. Often filing chapter 13 bankruptcy gives you better chance to keep it and not get seized by the banks or the party representing your creditor and other lenders.
Exempted items include clothing, tools of the trade and home furnishings. Main protections include foreclosure, repossession, wage garnishment, creditor harassment and seizure of bank accounts. Please remember that the specific requirements, eligibility, exemptions and protections vary state to state and can be difficult to explain in detail as a result.
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