1.0 Under Chapter 7
1.1 In General
Whether you retain or lose property in a bankruptcy depends on the type of property, the nature of the debt against that property, the amount of debt that you have, the trustee who is appointed in your bankruptcy, and the type of bankruptcy that you file.
1.2 What Happens to Under-Secured Property?
In the event that you have property that is pledged as collateral and the debt exceeds the fair market value of the property, you may surrender, reaffirm, or redeem such property. The Court will have no interest in the property because it cannot be sold for more than the debt.
1.3 What Happens to Over-Secured Property?
Over secured property is when the value of the property exceeds the amount of the debt against that property. For example, a vehicle worth $3000 with a debt of $2000. In the case of over secured property the first question which must be asked is if there is an exemption which can be applied to your equity in that property. If there is an exemption which equals or exceeds the amount of equity in the property and you are willing to reaffirm or redeem, you may keep the property. If there is no applicable exemption or you don’t wish to claim it, the property could be sold, the underlying debt paid, and the net proceeds used to help pay creditors.
1.4 What Happens to all the other Property?
As to all other items of property, it is necessary to determine whether an exemption exists with regards to that property. If the value of the exemption meets or exceeds the value of the property you may retain that item. In the event that you have an exemption in property which is less than its fair market value, the property could be sold by the court and your exemption provided to you in cash. For example, if you had a $3500 dollar car and an exemption of $2500 dollars; the vehicle could be sold, $2500 paid to you in cash, and the balance of the proceeds used to pay your creditors. It can take a number of months to receive payment of your exemption after you have surrendered the property to the trustee. If there is no exemption in the property, it can be sold and the net proceeds of sale used to pay creditors.
1.5 What are exemptions?
Congress has determined that individuals filing bankruptcy should be able to retain certain items of property. The theory being that you need certain basic items to sustain your life and start over economically. Exemptions typically include items such as clothing, household goods (like beds, dishes, pots and pans), tools of your trade, and equity in a home.
While congress has establish federal exemptions, they have also given each state the right to set the exemptions that apply to bankruptcies filed within their state. In Utah these exemptions are found in Utah Code Annotated 78-23-1 et seq. Some of the exemptions available for a married couple include $40,000 of equity in real property, a washer, dryer, fridge, freezer, stove, microwave, sewing machine, all beds and bedding, all clothing (excepting furs), a 12 months supply of food, up to $1000 of dining/kitchen tables and chairs, up to $1000 of additional household furnishings and appliances, up to $1000 of items with sentimental value, up to $1000 of books, animals, and musical instruments, up to $3500 of the tools of ones trade, and up to $2500 each in a motor vehicle. A husband and wife may combine their separate vehicle exemptions in a single vehicle.
The new law adds a number of addition complications to determining exemptions. Two of them are as follows. First, for the Utah exemptions to apply you must have lived in Utah continuously for the last two years. If you lived anywhere other than Utah during that time, you must use the exemptions of the place where you were residing just prior to that time period. Second, the value of your homestead exemption may be reduced if you disposed of property in the last 10 years with the intent to “hinder, delay, or defraud” creditors.
2.0 Under Chapter 13?
As a general rule, you will be allowed to retain all of your property in a Chapter 13. This is because you are making repayment on your debt. However, there are exceptions. First, you may voluntarily surrender property to a creditor. Second, you may sell property (with permission of the court) within a six month period after filing and have the proceeds distributed by the trustee to your creditors. Third, the court may require you to surrender luxury items. And fourth, you must surrender to the trustee each year the amount of any tax refund in excess of $1000.