It's All About the Equity

So you're considering bankruptcy, and doing your research online. You realize that in a chapter 7 bankruptcy some of your property could be subject to liquidation. You also learn that there are certain exemptions that allow some of your property to be protected from liquidation.

Common Belief About Bankruptcy Exemptions
Most people in their research come to the conclusion that a bankruptcy exemption must cover the entire value of their property to protect it. This is inaccurate.

The exemptions protect your equity in said property.

It's the Equity in the Property that Matters
Your equity is what the bankruptcy trustee is looking for in a chapter 7 case.

For example, if you have a 2008 Ford Focus worth $10,000 and the automobile exemption in your state is $5,000, then $5,000 of your equity in the car is exempt from bankruptcy. Depending on what you owe on the car, a $5,000 may or may not be sufficient to cover it.

If you owe $10,000 on the car note, you have zero equity so there is nothing for the trustee to get out of it. If you owe nothing on the car, i.e. you own it outright, then the trustee may choose to liquidate it. Most people fall somewhere in the middle, or even owe more than the car is worth. This is why what seems like a "small" exemption amount is almost always enough to protect the property.

The Same Goes for Your Home
For homeowners considering bankruptcy, the most worrying thought is losing the house. A primary residence is almost always covered by the largest exemption. To be more precise, the equity in you have in your home is protected by the homestead exemption.

While some of us are fortunate to have any equity whatsoever, many homeowners have little or no equity due to a floundering real estate market. Even if you have a substantial amount of equity in your home, it should be covered by the available exemption.

What to Remember
Always remember that the chapter 7 trustee is looking for ways to get some money for creditors. This means finding your significant non-exempt equity. A house with a loan against it often offers little in the way of non-exempt equity, as does a car with a loan on it. This is the fundamental reason the great majority of people who file for a chapter 7 "liquidation" bankruptcy actually have no property liquidated.

Want to learn more about how bankruptcy works with regard to your property? See this guide on Your Property in Bankruptcy.