Regardless of whether this year goes down in history as being the time in which the recession officially ended, our economy is still feeling its effects. According to the American Bankruptcy Institute, more than 1.6 million people are expected to have filed for personal bankruptcy by the end of the year. Almost 65% of filers chose “income reduction” as a reason for filing, while 42% listed “job loss” as their primary reason. While some filers believe that because they’ve been conscientious borrowers and consumers they’ll have something to show for in the future, whether it be savings or assets, it is actually the opposite. Those filers that have equity in their homes, possess cars that are partly or fully paid for, and hold savings accounts will actually have more for a trustee to take and sell off to pay creditors. Bankruptcy doesn’t care how much you have, or how responsible you’ve been in the past.
The question is: what is protected when it comes to bankruptcy? What and how much someone in bankruptcy can keep depends mostly on where they live.
There are a number of exemptions and loopholes in each state that allow consumers to hold onto some assets, and there are also assets that bankruptcy trustees aren’t interested in taking because they won’t yield profits to pay creditor, like a home or car, if the filer owes more it’s worth. It’s extremely important to know that if you or your business is in danger of bankruptcy, what will be protected and how your future will look. Knowing the facts can help you prepare for what’s to come, and possible determine whether bankruptcy is actually the right choice for you. We’ve compiled a list of assets that may be protected in bankruptcy.
- A Home. As pointed out earlier, keeping your home depends on the state you live in and the equity in your house. If there is no equity in the home, and the owner continues to make steady payments, you should be able to hold onto the home. For those filers that do have equity, most states offer an exemption — money from the trustee’s sale of the home that stays with the homeowner. Anything over that the amount of the sale is applied to outstanding debts and goes to paying the trustee.
- Tax-Exempt Retirement Funds. Even though most tax-exempt retirement funds like 401(k)s and IRAs are out of reach from creditors, trustees view these accounts skeptically and will flag suspicious activities, like dumping cash and investments – which are usually not protected in full in bankruptcy – into retirement plans. Those filers trying to protect their assets in this way will risk losing some of that amount.
- Vehicle. Much like the ramifications surrounding a home, being able to keep a vehicle is dependent upon the state you live in, as well as how much you owe on the car. If you owe more than the car is valued, and continue to make steady payments, you should be able to keep it. If a car is paid-off, car owners can keep it if it’s worth less than the state exemption, but drivers who have a car loan and some equity in their car can see their vehicle seized and sold, and recover only their equity up to the exemption.
- Life Insurance Policy. Depending upon the state, there could be exemptions, but when it comes to life insurance policies, only term insurance policies are safe after bankruptcy. Whole-life insurance policies are a different story, because they are viewed by the government as investments.
- College Savings. If the filer is the beneficiary, say goodbye to the savings, which trustees will cash out to pay creditors. However, if the beneficiary is a dependent, and the savings plan is over two years old, the plan is safe. If the plan is less than two years old, protection is limited to $5,000, and creditors can take what’s been saved beyond that.
It’s important to know the facts before you decide to file for bankruptcy. Simply knowing what of your most important assets is salvageable could help you in determining whether bankruptcy is the right choice for you. As bankruptcy numbers continue to rise - more personal bankruptcies are projected to be filed since 2006, a year after new laws went into effect – it’s clear that this rising trend needs to be researched and talked about more in order to educate those in danger.