The Chapter 7 straight bankruptcy is also known as a “liquidation” bankruptcy. That is, in reviewing your case the Trustee appointed by the Bankruptcy Court examines your assets to determine if there is anything he would be permitted to seize, for the purpose of selling the asset and obtaining funds to pay toward your unsecured creditors who are otherwise being discharged of their debts. Congress has determined that you will not be permitted to keep an unlimited amount of assets if you will then not be paying your unsecured creditors anything by filing Chapter 7. However, much of your property is protected from being taken under federal and state laws effecting bankruptcy.
Your residence: If the payoff balance of the mortgage on your residence is greater than the current value, your house will not be taken. If the house were to be taken and sold, all the proceeds would go to the mortgage-holder, and there would be no moneys left over to pay to your unsecured creditors, so selling it would serve no purpose. Even if your house has equity, it may still be protected. The State of Ohio has set forth that equity in any residence to the extent of approximately $20,000.00 is protected. Thus, if your residence is worth $100,000.00, with a mortgage of only $80,000.00, it should be protected from being seized in a Chapter 7 bankruptcy. (There may be an exception in the event the mortgage document has a defect--this will need to be reviewed by an attorney.)
Automobiles: The same practices apply with regard to automobiles, although the exemption for equity in an auto is only approximately $3,200.00. (Again, the lien documents will need to be reviewed to make sure there are no defects.)
Retirement benefits: In general, ERISA-qualified plans, 401k accounts, 403b accounts, and IRAs (including Roth IRAs) are protected. The Trustee will want to see verification of the type of retirement account you have. If yours is not one of the above, it will need to be reviewed by an attorney to determine whether or not it is protected.
Household goods and furnishings: Some people I meet with for the first time actually fear that if they do file a straight bankruptcy, someone from the Bankruptcy Court will pull up to their residence with a moving van and review all their furniture and household goods. This is not the case. Any normal, ordinary household goods and furnishings are also protected from being taken to be sold.
Chapter 7 liquidation vs. Chapter 13 debt repayment plan: If you file a Chapter 13 bankruptcy, in which you propose to repay your unsecured creditors at least in part, the Trustee will not attempt to seize any of your assets, even if they are not protected. However, if you do have unprotected assets, you may be required to pay more toward the unsecured creditors during the three to five year time period of the plan. Counsel will be able to review this calculation with you.
