What Assets Do You Lose in Chapter 7 Bankruptcy

How Exemptions Protect Your Property

Exemption laws determine what property you keep in bankruptcy. Every state designates categories of property as exempt from creditors, including bankruptcy trustees. These exemptions ensure debtors retain enough to live and work after bankruptcy rather than emerging destitute.

The critical concept is equity, not total value. If your car is worth $15,000 but you owe $13,000 on the loan, your equity is only $2,000. A state with a $5,000 vehicle exemption fully protects that car because your equity falls below the limit.

Different states have dramatically different exemption schemes. Texas and Florida offer unlimited homestead protection, allowing debtors to keep million-dollar homes. Other states cap homestead exemptions at amounts ranging from $25,000 to $500,000 or more.

Some states let you choose between state exemptions and a federal exemption set. The choice depends on your specific assets and which scheme provides better protection. This is one reason working with a local bankruptcy attorney matters significantly.

Exemptions explain why most Chapter 7 cases involve no asset liquidation. By the time someone files bankruptcy, they typically have little unencumbered equity in anything. Homes are mortgaged. Cars have loans. Retirement accounts are automatically exempt. The trustee finds nothing worth taking.

Expert insight from Jeffy Gotsz, Bankruptcy Attorney: "Do not assume your home or car is at risk without calculating your actual equity. Most people's fears about losing property turn out to be unfounded once we run the numbers together."

Your Home in Chapter 7

Homestead exemptions protect equity in your primary residence up to amounts that vary dramatically by state. The exemption applies to equity, meaning the difference between your home's value and what you owe on mortgages and liens.

States with unlimited homestead protection include Texas, Florida, Kansas, Iowa, and a few others. In these states, you can keep your home regardless of equity as long as it falls within acreage limits. A million dollars in home equity is fully protected.

Most states cap homestead exemptions. California protects between $300,000 and $600,000 depending on county. New York protects up to $179,950 in most areas. Massachusetts protects $500,000 automatically. These amounts cover most family homes.

If your equity exceeds exemptions, Chapter 7 creates risk. The trustee could force sale of your home, pay you the exempt amount, pay off mortgages, and distribute remaining proceeds to creditors. This scenario pushes people toward Chapter 13 instead.

Continuing mortgage payments is separate from exemption protection. Exemptions let you keep equity. Keeping the home requires staying current on mortgage payments. You can have fully exempt equity but still lose the house to foreclosure if you stop paying.

Calculating Home Equity

Home equity equals fair market value minus all mortgages, liens, and estimated selling costs. If your home would sell for $400,000 and you owe $320,000 on the mortgage plus $20,000 on a HELOC, your equity is $60,000 before selling costs.

Deducting estimated selling costs is generally allowed. Real estate commissions of 5% to 6% plus closing costs reduce net proceeds. On a $400,000 home, that might be $25,000 to $30,000 in selling costs that effectively reduce equity.

Vehicle Exemptions

Every state provides some vehicle exemption, recognizing that transportation is essential for work and daily life. Exemption amounts range from about $2,500 in some states to $15,000 or more in others.

Like homes, vehicle exemptions apply to equity. A car worth $20,000 with a $18,000 loan has only $2,000 equity, easily protected in any state. Paid-off vehicles or those with significant equity face more scrutiny.

Most working people drive cars worth less than exemption amounts or have loans reducing equity below limits. The people most at risk are those with paid-off newer vehicles worth substantially more than their state allows.

If vehicle equity exceeds exemptions, several options exist. You could sell the car yourself, buy something less valuable, and keep the difference within exemptions. You could pay the trustee the non-exempt amount to keep the vehicle. Or you could file Chapter 13 and keep the car while paying its value to creditors over time.

Married couples filing jointly can each claim vehicle exemptions in most states, protecting two cars. This helps families with multiple vehicles.

Retirement Accounts Are Completely Protected

Retirement accounts receive extraordinary protection in bankruptcy, often unlimited regardless of balance. This reflects strong public policy favoring retirement security and recognizing that retirement funds are irreplaceable.

ERISA-qualified plans including 401k accounts, 403b plans, and traditional pensions are completely exempt under federal law with no cap. A $2 million 401k receives the same protection as a $20,000 one. This protection applies in every state.

Traditional and Roth IRAs are protected up to approximately $1.5 million under federal bankruptcy law. SEP-IRAs and SIMPLE IRAs also qualify. The cap is high enough that virtually no consumer bankruptcy filer exceeds it.

This protection creates one of bankruptcy planning's most important rules: never raid retirement accounts to pay unsecured creditors. That money is protected. Withdrawing it converts protected assets to potentially unprotected cash while incurring taxes and penalties.

I have seen people withdraw tens of thousands from retirement accounts to pay credit cards, then file bankruptcy anyway when the money ran out. They gave away protected assets that they could have kept. This is one of the most painful mistakes people make.

Expert insight from Jeffy Gotsz, Bankruptcy Attorney: "Your retirement accounts are safe. Do not touch them to pay debts. The money cannot be taken in bankruptcy regardless of how much you have saved."

Personal Property and Household Goods

Every state exempts reasonable household goods, furniture, clothing, and personal effects. The amounts typically range from $10,000 to $15,000 total, allocated across all household items. Since used furniture and appliances have minimal resale value, most people's possessions fall well within limits.

Trustees do not want your couch, television, or kitchen appliances. These items cost more to auction than they produce. A used sofa might bring $50 at sale. After costs, that produces nothing meaningful for creditors. Practical economics protect ordinary household goods.

Valuable items may face scrutiny. Expensive artwork, antiques, coin collections, jewelry beyond wedding rings, and luxury items might exceed exemptions. If you own items of significant value, discuss them specifically with your attorney.

Tools of your trade receive separate exemption protection in most states. A carpenter's tools, a photographer's cameras, or a mechanic's equipment are typically protected to ensure you can continue earning income.

Clothing is exempt without meaningful limit in every state. Nobody expects you to surrender your wardrobe. Similarly, necessary medical equipment, prescription medications, and basic necessities receive broad protection.

Assets That Face Genuine Risk

While most consumer assets are protected, certain property types face genuine exposure in Chapter 7. Knowing what is actually at risk helps you plan appropriately.

Cash and bank account balances receive limited protection. Exemptions for cash typically range from $500 to $2,500 depending on state. Large bank balances on filing day might be partially exposed. Strategic timing of filing relative to paycheck deposits can help.

Second homes and vacation property receive no homestead protection. Only your primary residence qualifies. Investment real estate, rental property, and vacation homes are non-exempt assets that trustees can sell.

Non-retirement investment accounts like brokerage accounts are generally not exempt. Stocks, bonds, and mutual funds held outside retirement accounts can be liquidated to pay creditors.

Valuable collections face exposure beyond personal property exemptions. Coins, stamps, wine collections, sports memorabilia, and similar items may exceed protection amounts.

Pending lawsuits where you might receive money can become estate property. If you have a personal injury case or other potential recovery, the trustee may step into your shoes to pursue and collect that money for creditors.

Recent large transfers to family members can be reversed. If you gave money or property to relatives within two years of filing, the trustee can potentially recover those transfers as fraudulent conveyances.

Business interests may face exposure depending on structure and value. Sole proprietorships are personal assets subject to exemption analysis. LLC and corporation interests are property that trustees evaluate for liquidation potential.

Protecting Assets Before Filing

Strategic planning before bankruptcy can legitimately maximize protection. Converting non-exempt assets to exempt forms is generally permissible when done reasonably and without fraudulent intent.

Paying down mortgage principal increases home equity protected by homestead exemptions. Contributing to retirement accounts moves money into fully protected status. These conversions are normal and expected parts of bankruptcy planning.

Timing and amounts matter significantly. Converting large sums immediately before filing looks suspicious and may be challenged. The best planning happens months before filing, in moderate amounts, for legitimate purposes.

Spending non-exempt assets on reasonable living expenses is acceptable. Using money to pay rent, utilities, groceries, and other necessities is not problematic even if that money would otherwise be exposed in bankruptcy.

What you cannot do is hide assets, transfer property to relatives with intent to retrieve it later, or make preferential payments to favored creditors like family members. These actions constitute bankruptcy fraud with serious consequences.

Work with a bankruptcy attorney on pre-filing planning. Legitimate strategies exist, but the line between acceptable planning and fraudulent concealment requires professional guidance to navigate.

FAQ

Will I lose my house in Chapter 7?
Only if your equity exceeds your state homestead exemption, which is uncommon for typical family homes.

Can the trustee take my car?
Only if equity exceeds exemptions. Most financed vehicles are fully protected.

Is my 401k safe from bankruptcy?
Yes. ERISA-qualified retirement accounts have unlimited federal protection.

What about my wedding ring?
Most states specifically exempt wedding and engagement rings. Extremely valuable jewelry might face partial exposure.

Can I keep my furniture?
Yes. Household goods exemptions cover typical furniture and appliances, and trustees rarely pursue low-value items anyway.

What if I have non-exempt assets?
You might pay the trustee to keep them, file Chapter 13 instead, or allow liquidation. Your attorney can advise on best options.