Many people are concerned that filing for personal bankruptcy means losing everything they own. After all, in a chapter 7 bankruptcy, everything you own and owe is legally transferred to a Bankruptcy Trustee, who can then use your assets to pay your debts. Legal ownership of the assets is transferred back to you when the bankruptcy is completed. But you won’t lose all your assets when filing bankruptcy, because there are some things the Bankruptcy Trustee cannot use to repay your debts.
Retirement Accounts Survive Bankruptcy
If you go through bankruptcy, your 401k and 403b accounts survive, no matter how much money is in them. If you have money in individual retirement accounts (IRAs), you get to keep up $1.3 million of your IRAs.
Wildcard Exemption or Homestead Exemption
In California, you are entitled to either the homestead exemption, or the wildcard exemption. With the wildcard exemption, you are allowed to keep approximately $28,000 worth of assets and cash that you select. This means you can keep your baseball card collection or your camper or anything else that is either less than $28,000 or that would be difficult for the Bankruptcy Trustee to sell and get a decent price for. For example, is it difficult for trustees to sell most jewelry (your marriage and engagement rings are exempt from sale), particularly for anywhere close to full value.
Or, if you are a home-owner, you can select the homestead exemption. This allows you to keep between $300,000 to $600,000 of equity in your primary residence in California. The actual amount is based on the median price of a house sales in your county in the year prior to filing bankruptcy. For example, right now, the median sales price in Ventura County is $742,000, which means anyone filing bankruptcy in Ventura county can protect up to $600,000 of equity in their main residence. Learn more here on my website.
Think About What You’ll Gain, Not What You May Lose
The reality for most people considering bankruptcy is that they already owe more than they own, or close to it. Most people have liquidated a lot of accounts and sold assets by the time they are seriously considering bankruptcy. So, the reality is that there’s often not much left to lose in bankruptcy. It’s better to stop fixating on what you might “lose” in bankruptcy. Keep the focus of your thoughts on the good that will come from filing for bankruptcy: a chance to eliminate the debts you owe and make a fresh financial start. However, you must give your attorney all the facts about your financial situation (good, bad, and worse), so s/he can accurately determine whether filing bankruptcy will improve or worsen your financial situation.
And remember: speaking to an attorney about whether bankruptcy is appropriate for your situation is simply gathering information. You don’t need to commit to anything, but you will be much better off educating yourself on the options that can help you get out from crushing debt.
April 19, 2021