The thought of filing for bankruptcy is often associated with the repo man sweeping in to seize assets and sell them. This is not the reality, however, and many people find that there are ways to protect their property during a bankruptcy proceeding. Some of these strategies are fairly simple and involve little more than re-titling assets or changing the way they hold title to property. Others may require a bit more planning and might include asset protection trusts, accounts-receivable financing, stripping out equity in the family home, and more.
While it is true that filing for bankruptcy does not automatically stop creditors from trying to recover debts owed by the filer, it does make it more difficult for them to do so. That is because federal and state bankruptcy law sets aside exemptions that can be used to protect certain types of property. Most of these exemptions are for big items like a home and vehicle, but there are also some that protect more personal belongings such as clothing, furniture, and collectibles.
A key thing to remember is that you must list any property you wish to protect on your bankruptcy paperwork. If you do not list it and claim an exemption, your trustee will be able to sell that item for the benefit of your creditors. The exception to this rule is a wildcard exemption, which can be used to protect property that does not fit into any of the other existing categories. This is typically used to protect unique valuables such as wedding dresses, antiques, and family heirlooms.
Generally, most people can protect the equity in their home through the homeowner’s exemption, but this does not apply to second homes or vacation homes. Additionally, the amount of equity in a car can also be protected through the motor vehicle exemption. Those who want to keep their cars, but who have equity that exceeds the allowed amount can try to convince the trustee to accept a different piece of exempt property in exchange for the car. This is typically successful, and many people are able to keep their cars.
Finally, some forms of income are automatically protected by federal and state bankruptcy law, including Social Security payments, unemployment benefits, 401(k) accounts, disability checks, and veterans’ benefits. These are protected whether or not you list them on your bankruptcy papers, but you will need to talk with an attorney if you have other sources of income that you want to protect.
Some other ways to protect assets during bankruptcy include transferring ownership of property into an unbreakable trust or giving it away to friends and family members. These can be effective, but it is important to ensure that the transfer does not violate illegal conveyance laws.