Having property sold in bankruptcy is not anyone’s first choice but…

One of the biggest jobs for a bankruptcy attorney is exemption planning. Exemption planning involves understanding how state (or sometimes federal) law will affect a client’s property when they file bankruptcy.

For example, ERISA qualified 401(k) accounts are exempt from forced sale in bankruptcy. In fact, the Supreme Court has ruled that they are not part of the bankruptcy estate. In most cases, debtors can file bankruptcy and keep their 401(k). However, it will be your bankruptcy attorney’s job to make sure that your 401(k) is ERISA qualified so that it won’t be lost in bankruptcy.

What happens, if even after careful planning and exemption analysis, your attorney determines that some of your property will be subject to sale by the trustee ? Well, it’s a situation that many folks work very hard to avoid. Of course, no one wants to see there home or another valuable asset sold. It is usually not the best case scenario. Having said that, it could be a good thing. Yes, I said it, it could be a good thing to have property sold in a bankruptcy.

You’ll Receive a Check

Let’s say you own a beautiful 2007 BMW worth $35,000. Your outstanding loan on the car is $20,000, leaving $15,000 of equity for the trustee to go after. Due to credit card debt, medical bills and a failed business, you need to file bankruptcy. Your debts far exceed your assets. Problem: under most state bankruptcy laws you’ll lose the BMW. The trustee will sell the car and distribute the non-exempt equity to creditors. How is this a good thing?

First, parting ways with the car is your ticket to a debt free life. The deal in a chapter 7 bankruptcy case is that non-exempt assets are sold to pay back creditors. If that is what it takes to get a fresh start so be it. On the positive side, much of your property will probably be exempt which means you’ll be able to keep it through bankruptcy.

Second, you probably can’t afford the car. The trustee taking it off your hands will relieve you of the elephant size payments you’ve been struggling with.

Last, you’ll receive a check. Having property sold in bankruptcy isn’t a complete loss. You’ll only lose the non-exempt value in the property, meaning after the sale you will receive a check in the amount of the applicable exemption. Need an example? I thought so. The Minnesota car exemption allows debtors to protect up to $4,400 of value in a car. If the $35,000 BMW (with $15,000 of equity) was liquidated under Minnesota bankruptcy laws, the debtor would be entitled to a check for $4,400 of that equity after the sale. $4,400 might not be enough to buy a new BMW, but it would go a long way to procuring a new (used) auto to get from point A to point B.

Thinking of filing bankruptcy but worried about losing valued possessions? Talk to a bankruptcy attorney, the picture might be brighter than you’d suspect.