Myth #3: If You File for Bankruptcy, You’ll Lose Everything You Have

In the vast majority of cases, nothing could be further from the truth. The fact is that most people who file bankruptcy don’t lose anything except their debts.

First, while laws vary from state to state, every state has exemptions that protect certain kinds of property. Using Maryland as an example, there are specific exemptions to protect such things as your household goods and furnishings, the cash value in life insurance and personal injury claims. There is even a “wildcard” exemption of $11,000 per person that can be applied to whatever you want. Most states even have “homestead exemptions,” which protect some or all of the equity in your home. Some allow you to exempt jewelry, guns, family Bibles, tools, etc. Federal law fully exempts your 401(k), IRA and other pension plans: neither creditors (except possibly the IRS) nor the bankruptcy trustee can touch them.

In those rarer situations where you have more property than can be protected by available exemptions, there are Chapters 11, 12 and 13. In these chapters, you keep everything you have in exchange for paying your creditors some or all of what they are owed. Even in Chapter 7, however, over 95% of all cases are “no asset,” meaning that the debtor keeps everything and no distributions are made to creditors.

Filing bankruptcy does not generally wipe out liens. Therefore, if you want to keep a car, truck, home or business equipment that is collateral for a loan, you need to keep your payments current. If the payments are current and there’s no equity (or you can exempt the equity), you can rest assured you will be able to keep these items. But if your home is underwater, or your car is worth less than you owe on it, the bankruptcy trustee won’t want to sell it, because it won’t being in any money to distribute to your creditors.

 
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