The likelihood that property will be sold in bankruptcy. This is a misconception that every bankruptcy blog should and does cover. The consumer’s biggest fear. “I will file for bankruptcy, but I’ll be ruined!”
“The trustee will take every last stick of furniture, my car, my home and sell it to satisfy my creditors. I’ll be living on Main Street in a cardboard box!”
In Most Cases, Having Property Sold By the Trustee is Not Something You Need to Worry About
Stop the fantasy. Let me repeat what every other member of the bankruptcy bar will tell you: you will not lose all of your property in bankruptcy. Even if property is sold in a bankruptcy, you will be entitled to a check for the amount of your exemption.
What does this mean?
Let’s begin with a little background on exemptions. Most of the time, people file for Chapter 7 bankruptcy, shed their unsecured debt and move on to a fresh financial beginning without losing any of their property. This is the case, because most states, including Ohio, have enacted exemption laws that protect property, not only from creditors, but from the bankruptcy trustee as well. If the value of your property is below the exemption limit, the trustee can’t touch it.
For example, I wrote recently on this blog about the new Ohio Homestead exemption which allows married couples filing a joint Chapter 7 bankruptcy, to protect up to $250,000 of equity in their home. If you file bankruptcy with your wife and your home equity is less than $250,000, your home is protected as exempt. For more on the new Ohio Homestead exemption, see: Ohio’s Homestead Exemption in Bankruptcy Just Got a Lot Bigger!
An Example of What Happens When a Car is Sold in Bankruptcy
For an example of what happens when property exceeds an allowed exemption, we’ll use Ohio’s car exemption. Let’s say you own a car worth $7,000 free and clear, meaning there are no liens against the vehicle. You find yourself struggling with debt and decide to file for chapter 7 bankruptcy. Since Ohio’s car exemption only allows $3,450 of equity to be protected, the trustee may have some interest in selling the car. In most cases, your attorney will be able to negotiate a cash settlement which will allow you to keep the car, even when it exceeds the allowed exemption, however, even if the car were sold, you’d receive some of the proceeds from the sale. You wouldn’t “lose everything.”
Having Property Sold in Bankruptcy Doesn’t Defeat Your Exemption, You’ll Still Receive a Check
Just because property is sold in bankruptcy, it doesn’t mean that your exemption is defeated. In the example above, if the trustee were to sell your car, you would still be entitled to a check for $3,450, which represents the amount of the Ohio car exemption. When a chapter 7 trustee sells property, it doesn’t mean you lose everything, it only means that the non-exempt equity you have in the property is distributed to your creditors.
Remember, if the trustee sells your stuff, it doesn’t mean you lose everything. Your ownership interest is converted to the cash equivalent of your state’s exemption. For more information about how Chapter 7 bankruptcy may affect your property, contact an attorney.