If you have significant debts that you are struggling to repay, you may be considering bankruptcy. However, you may be worried that if you file for bankruptcy, you could lose certain assets that you own, such as your home, your family’s vehicles, or valuable possessions. By understanding the laws that will apply to you when you file for bankruptcy or seek other forms of debt relief, you can determine your options for asset protection and the best ways to address your debts and maintain financial stability.

Using Bankruptcy Exemptions

If you are planning to file for Chapter 7 bankruptcy, you may be required to turn over certain assets, which will be liquidated to repay as much of your unsecured debts as possible before these debts will be discharged. However, certain types of property are exempt from liquidation. As you prepare for bankruptcy, you may be able to utilize these exemptions to avoid turning over your assets.

To maximize the amount you can protect from liquidation, you may be able to convert non-exempt assets into exempt assets. For example, you may sell non-exempt assets and put the profits earned toward paying off an auto loan, since an exemption may apply to your vehicle. You may also be able to make contributions toward a retirement account such as an IRA, since these accounts are generally exempt from liquidation. However, it is important to avoid making fraudulent transfers. If certain types of transfers are made within one year of filing for bankruptcy, this may result in a bankruptcy case being dismissed.

Originally published: February 28, 2020 -- Updated: December 2, 2021

UPDATE: In addition to understanding how filing for bankruptcy may affect ownership of a vehicle, a debtor will want to determine whether they can use a “cramdown” to reduce the amount they owe on an auto loan while addressing other debts during the bankruptcy process. This option is available in a Chapter 13 bankruptcy, and it can ensure that a person will avoid the potential loss of their vehicle while still being able to make affordable payments.

A cramdown is a reduction in the amount owed on an auto loan. A debtor may be eligible for a cramdown if the remaining amount that they owe to a lender is greater than the actual cash value of the vehicle. In addition, the debtor must have originally purchased the vehicle at least 910 days before filing for bankruptcy. For example, if $20,000 is owed on a loan, but the car’s market value is $13,000, the amount of the loan may be reduced to $13,000. The remaining $7,000 will be classified as an unsecured debt and included in the debtor’s Chapter 13 repayment plan. By reducing the amount of this loan and discharging other debts, a person can ensure that they will be able to maintain financial stability and avoid the loss of their vehicle.

If you have significant debts that you are struggling to repay, bankruptcy may be your best option for regaining financial security and ensuring that you will be able to address your ongoing needs going forward. By filing for bankruptcy, you can put a stop to harassment from creditors and prevent collection actions such as wage garnishment, repossession of property, or home foreclosure. You can then determine your best options for receiving relief from the debts you owe. 

One of the most important steps during the bankruptcy process is the “meeting of creditors,” which is commonly known as the “341 meeting,” since it is addressed in section 341 of the U.S. Bankruptcy Code. This meeting usually takes place at a bankruptcy court, and it will be conducted by the trustee assigned to the bankruptcy case. While creditors or their legal representatives may be present at this meeting, in many cases, they do not choose to attend. By understanding the issues that will be addressed during the 341 meeting, you can make sure you are properly prepared, and you can avoid any issues that may affect your ability to complete the bankruptcy process.

Questions Asked During the 341 Meeting

The purpose of the 341 meeting is to verify the facts of your bankruptcy case and ensure that you have provided the correct information that will allow you to complete the bankruptcy process. During the meeting, the bankruptcy trustee will verify your identity and other personal information, such as your home address and the address of your employer. You will need to provide documents that confirm your identity, such as your driver’s license and Social Security card. You may also need to provide documentation to verify your employment, such as a pay stub or W-2 form.

Debts are a reality for most Americans, and while most people are able to make ongoing payments, some may experience financial difficulties that make it difficult to pay back what is owed. If you have gotten behind on payments, you may have begun receiving calls from creditors. Debt collectors can sometimes take aggressive actions to attempt to recover money, and if you have experienced harassment by creditors, you will want to determine the best ways to address this issue. A skilled bankruptcy lawyer can advise you of your options and work with you to determine the forms of debt relief that are available.

Debtor Rights Under the Fair Debt Collection Practices Act

Federal laws dictate the rights of consumers and the restrictions that apply to creditors who attempt to collect debts. The Fair Debt Collection Practices Act (FDCPA) ensures that debtors are protected from harassing behavior such as:

• Making threats - Creditors cannot threaten to use physical violence, and they are prohibited from using obscene or abusive language. They are also restricted from threatening to ruin your reputation or otherwise attempting to defame you to employers, family members, or people in your community.

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When a person or family is struggling to pay the debts they owe, bankruptcy can be a good option for eliminating debts or repaying some debts while avoiding issues such as foreclosure. Different types of debts may need to be addressed during the bankruptcy process, and a person will need to understand how their obligations to pay child support or spousal support will be affected. Determining the role that bankruptcy will play as they make ongoing support payments or address unpaid payments can ensure that a person will be able to maintain financial stability going forward.

Bankruptcy and Domestic Support Obligations

Bankruptcy will allow some debts to be discharged, meaning that the debtor will no longer be required to pay what is owed. However, domestic support obligations, including child support and spousal support, cannot be discharged through bankruptcy. A person will be required to meet any support obligations ordered by a family court, and any past-due payments will need to be made up, along with any interest that may apply.

For those who pass the means test, Chapter 7 bankruptcy can provide the best form of relief for certain types of debts. Credit card debts, medical bills, and other unsecured debts may be discharged once the bankruptcy process is completed. In some cases, certain assets may need to be turned over and liquidated, but a no-asset bankruptcy may be possible, and many assets will be exempt from liquidation. While Chapter 7 bankruptcy will not eliminate a person’s family support obligations, the elimination of other types of debts can help ensure that they will be able to make ongoing support payments.