What you keep when filing Chapter 7 depends on your exemptions. These vary among the states, but they are all based on the belief that the person filing for relief should be able to live and work while he/she gets their financial situation put back in order.
- Common exemptions are for your primary residence, car, Personal items such as your clothes and furniture.
- You Probably will be able to keep your cell phone
- You may be able to keep your credit card
The court also exempts retirement plans and usually exempts the tools that you need to do your job.
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Most Common Exemptions When Filing Chapter 7
The government put exemptions in place to help protect people while going through bankruptcy. The idea is to get people back on their feet, not beat them down further. One part of that is to let you maintain a standard of living while you clear up your financial situation. Exempt property is what you retain, but how does it work?
- The federal government has an exemptions list.
- Each state has its own list.
- In 16 states you can choose to use the federal or state list – Alaska, Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.
- California has two lists.
- You cannot mix exemptions from two lists.
- Each exemption has its own limit.
Each state handles things a little differently, but there are some common types of property that they try to protect.1
Can I Keep My Home?
Your home might be exempt, but it depends on how much equity you have. Also, you must meet the following:
- Your payments must be up to date.
- If the amount of equity is below the exemption level, you will likely retain your home. If it is higher, then the trustee may sell the home, give you the exemption amount, and use the rest to pay your creditors.
You should consult with an attorney before you file if you want to keep your home. See what your options are and learn what the rules are for primary residences in your state.
Can I keep my car?
If you own your car and it is worth less than the exemption amount you can keep your car. However, just like with your home, if it is worth more than the exemption amount the trustee may sell it.
You may also surrender your car to the court. They then sell it and use the proceeds to pay your creditors.
Will They Take My Furniture? Personal and Household Items
The trustee usually doesn’t sell your clothes appliances or furniture. Most states have exemptions for these, and their value usually isn’t enough to go over that amount. However, luxury items may exceed the limits. Some examples are:
- Expensive jewelry or watches
- Designer handbags
- Expensive furniture
- Designer clothes
If you have something expensive your exemption may cover it, but you should know that it may not be safe when you file.
Wages and Retirement Accounts
The court can seize wages you received before or during the bankruptcy proceedings. However, this only happens if the trustee believes you don’t need the money to live on. After the bankruptcy the court discharges your debts, so anything you make after that won’t be subject to seizure, either.
Welfare benefits and retirement accounts are protected, but only if you mark them as exempt on your forms. Social Security, 401K, 403B, unemployment, and other benefits are protected by federal law.
Can I keep my cell phone in Chapter 7?
Courts consider cell phones a necessity, so in most cases, you can keep it if you want to. Still, you need to disclose it as an asset and your bill as an expense. There are two components to this that you must consider: the physical phone and the service contract.
The hardware is expensive, so you must list it. Your trustee can liquidate it to pay bills, but it’s unlikely. This is because cell phones lose value quickly. Unless it is a very new and expensive phone it probably isn’t worth it for the trustee to sell it.
Your phone plan is an expense, and your trustee reviews it to make sure that it’s reasonable. If it’s much larger than normal you may get a bankruptcy audit. Because people use them instead of landlines today courts accept family plans as reasonable expenses. If you stay current on your payments, you can keep the plan.
If you don’t want the contract you can use your bankruptcy to get out of it. You can reject the contract, and the court will discharge any remaining payments. Before you do this, though, think about if you are leasing or financing your phone through the contract. If you are, then you will lose your service and the phone with the payments.2
Can I keep credit cards in Chapter 7?
In most cases, you can keep a credit card if you want to. While there are good reasons to have one, it is also a temptation to spend money you don’t have. Also, for your bankruptcy, it makes a difference if you have a balance on the card.
- Reaffirming credit card debt – You must list it with your debts. You keep the card, but your debt associated with it won’t be discharged.
- Zero balance – You don’t have to list it with your debts. You keep the card, and you don’t have to notify the company about your bankruptcy. They will probably find out, though, and they may increase the interest rate on the card.
If you have a high balance on your cards, it’s probably better to let them go. Have the court discharge the debt and apply for a secured credit card after the bankruptcy is over. Once you make on-time payments for six months to a year you can apply for a regular credit card again.3
Final Thoughts on What you Keep When Filing Chapter 7
What you keep when filing chapter 7 depends on what exemptions your state has and what your personal wants and needs are. The court won’t sell everything, but you must make decisions about what you really need.