Chapter 7 bankruptcy is also referred to as “liquidation bankruptcy.” This can be a very scary and intimidating phrase for those who have spent a lifetime acquiring the necessities of life; those essential elements of the American dream, such as a home and a car.
Therefore, many people wonder whether the court will strip away their property and possessions if they file Chapter 7. In general, the answer to that question is, no.
Good, hard-working people sometimes end up in financial hardship due to unexpected life events that are totally outside of their control, such as loss of employment, medical problems, family upheaval or failure of a business. The legislators who enacted the federal bankruptcy code recognized this fact.
The law was passed to give people a way to get out of crushing debt and obtain a fresh financial start. Taking everything away that a debtor has worked hard for would be counterproductive to this goal.
That is why both federal and New Jersey bankruptcy statutes provide exemptions from liquidation for property that is necessary and helpful for getting back on one’s feet. These exemptions are generous, including specific amounts for equity in a home, household goods, clothing, jewelry, cars and even the full, accumulated value of many types of retirement savings accounts. There is even a wildcard exemption that allows the debtor to choose to what property it should apply.
An experienced bankruptcy attorney can analyze your individual situation before you ever file to determine whether all of the property you own is covered by these exemptions. If all of your property is exempt under the law, there will be nothing for the bankruptcy trustee to liquidate, and the remaining debts will be discharged.
However, there are still options if you have more property you want to keep than the exemptions allow. In such a situation, Chapter 13 might be the best option. Chapter 13 may allow a debtor to reorganize debts while keeping all of his or her property. The Chapter 13 debtor enters into a payment plan in which payments are made to the court for three to five years according to the debtor’s financial means.