One of the most common questions that we received as bankruptcy attorneys is whether a debtor will lose property if he files a Chapter 7 bankruptcy. The myth that you “lose everything” when you file a bankruptcy under Chapter 7 may stem from the fact that a Chapter 7 bankruptcy is also known as a liquidation.
What many individuals do not understand is that simply because the trustee has the legal ability to liquidate assets does not necessarily mean that he will do so. Trustees only liquidate assets under certain circumstances. In fact, almost all Chapter 7 cases filed in Illinois are considered “no asset” cases meaning the debtor does not lose property because of the bankruptcy filing.
When Does a Debtor Lose Property in Chapter 7?
The following does not apply to the majority of debtors because most does do not lose property when they file bankruptcy. They get rid of their debts while keeping their assets; however, in a few cases debtors lose property either by choice or by law.
Voluntarily Surrendering Property
In some cases, a debtor may decide to lose property voluntarily by surrendering the property to a creditor. Debtors may choose to lose property so that they are no longer responsible for debts that cannot afford to pay or to prevent losing property that they value more.
For example, if the debtor owns a vehicle that is worth much less than the lien owed on the car, the debtor can surrender the vehicle to the creditor through the debtor’s bankruptcy case. The advantage for the debtor, in addition to getting rid of large car payments, is that no matter what the car sells for when it is liquidated by the creditor, the creditor cannot ever collect that deficiency from the debtor. In other words, the debtor is not legally liable for the remaining debt owed on the account after the vehicle is sold. By surrendering the vehicle and getting rid of the high car payment, the debtor can now afford to make his house payments to keep his home.
Using Bankruptcy Exemptions
On the other hand, there are a few cases where the debtor must lose property because it is not protected by an allowable exemption. Bankruptcy exemptions are designed to protect the equity in certain assets from the court and from creditors. If a debtor claims an exemption in an asset, the exemption protects any equity in the asset up to the maximum amount of the allowable exemption.
If the allowable bankruptcy exemptions cover the equity in the debtor’s assets, the debtor will not lose property through the bankruptcy. In most cases, this is the situation. This is why it is very important to consult an experienced bankruptcy attorney as soon as possible and definitely before filing bankruptcy. Your attorney will review your assets with you and the available exemptions to protect those assets.
An experienced bankruptcy attorney can give you advice as to whether your assets may be in jeopardy and you could lose property if you file a Chapter 7. In those cases, the attorney can discuss alternatives, such as a Chapter 13 bankruptcy filing, to protect your assets while resolving your debt problems.
Contact Our Office for a Consultation with an Experienced Illinois Bankruptcy Attorney
The attorneys of Pioletti Pioletti & Nichols represent individuals who need experienced bankruptcy attorneys. We serve clients throughout McLean, Woodford, Tazewell and Peoria counties by providing compassionate, competent legal services. Call our office at 309-938-4838 to schedule your free bankruptcy consultation.
When you need the assistance of an experienced bankruptcy attorney in Central Illinois, call the compassionate and skilled attorneys of Pioletti Pioletti & Nichols. We are dedicated to giving our clients exceptional service and support throughout the bankruptcy process.