Can a Debtor Keep a House, Car, and Other Property?
The answer depends on whether Chapter 7 or Chapter 13 is filed. It also depends on how much equity the debtor has in the property. For secured debts like mortgages and car loans, it depends on whether the debtor is current on payments. Finally, it depends on what exemptions are available in the debtor's state.
Chapter 7: Property and Exemptions
In Chapter 7, the trustee takes control of the debtor's non-exempt assets. The trustee sells them and uses the proceeds to pay creditors. However, exemptions allow the debtor to protect certain property from liquidation. If an asset is fully exempt, the trustee cannot sell it and the debtor keeps it.
Key points:
Equity matters: Equity is the value of property minus what is owed on it. If a debtor owns a car worth $10,000 and owes $8,000 on the loan, the equity is $2,000. Only the equity is subject to exemption rules. If the equity is fully covered by an available exemption, the debtor can keep the property.
Current on payments: For secured property (like a home or car), the debtor must be current on loan payments to keep it. Even if the equity is fully exempt, if the debtor is behind on payments, the lender can repossess or foreclose.
Reaffirmation agreements: To keep a car or other secured property after Chapter 7, the debtor may need to sign a reaffirmation agreement with the lender. A reaffirmation agreement means the debtor agrees to remain personally liable for the debt even after the bankruptcy discharge. If the debtor later defaults, the lender can repossess the property and sue for any remaining balance. Whether to reaffirm involves legal judgment and should be made with the advice of an attorney.
Chapter 13: Keeping Property
Chapter 13 allows a debtor to keep all property—both exempt and non-exempt. The repayment plan must pay unsecured creditors at least as much as they would have received if the debtor's assets were liquidated in Chapter 7. This is called the "best interests of creditors" test.
Key points:
Retaining ownership: Unlike Chapter 7, the debtor does not surrender property to a trustee. The debtor keeps a home, car, and other assets while making plan payments from income.
Catching up on secured debts: Chapter 13 lets debtors cure defaults on mortgages and car loans. The overdue payments are spread over the life of the plan. This is particularly valuable for saving a home from foreclosure.
Reaffirmation not required: Because the debtor is paying creditors through the plan and keeping property by court order, separate reaffirmation agreements are generally not needed.
Homes: The Role of Homestead Exemptions
The homestead exemption protects equity in a debtor's primary residence. Homestead exemption amounts vary widely by state. Some states offer unlimited homestead exemptions (though acreage and property size often apply). Others cap the exemption at a specific dollar amount (for example, $25,000, $50,000, or more).
In Chapter 7:
If the debtor's home equity is fully covered by the homestead exemption and the debtor is current on the mortgage, the home can be retained.
If equity exceeds the exemption amount, the trustee may sell the home. The trustee pays off the mortgage and the exemption amount to the debtor. The trustee distributes the remaining proceeds to creditors.
In Chapter 13:
The debtor keeps the home regardless of how much equity exists. The plan must satisfy the best-interests test. If the debtor has significant non-exempt equity, plan payments to unsecured creditors must reflect that value.
Vehicles: Exemptions and Current Payments
Most states provide an exemption for one or more vehicles. The exemption is often capped at a specific dollar amount (for example, $5,000 or $10,000 in equity).
In Chapter 7:
If the debtor's car equity is fully exempt and the debtor is current on the loan, the car can be retained.
If the equity exceeds the exemption, the trustee may sell the vehicle. The debtor can avoid this by paying the trustee the non-exempt amount.
A reaffirmation agreement with the lender may be needed to keep the car and remain liable for the loan after discharge.
In Chapter 13:
The debtor keeps the car. The debtor can catch up on any past-due loan payments through the plan.
Non-exempt equity is accounted for in the best-interests calculation. However, the car is not lost.
Other Essential Property
Bankruptcy exemptions typically protect:
Retirement accounts (401(k), IRA, pension plans)
Household goods and furnishings (up to a certain value)
Clothing and personal items
Tools of the trade (equipment needed for work)
A portion of wages or bank account funds
The specific exemptions and amounts vary by state. Some states allow debtors to choose between federal bankruptcy exemptions and state exemptions. Other states require debtors to use state-specific exemptions.
Summary Table: Keeping Property in Bankruptcy
| Property Type | Chapter 7 | Chapter 13 |
|---|---|---|
| Home | Retained if equity is exempt and debtor is current on mortgage | Retained regardless of equity; can cure arrears through plan |
| Car | Retained if equity is exempt and debtor is current on loan; may need reaffirmation | Retained; can cure arrears through plan |
| Other assets | Retained if fully exempt | Retained; non-exempt value affects plan payment |
| Secured debts | Debtor must be current; reaffirmation may be required | Can cure defaults through plan |