If you're drowning in debt, filing for bankruptcy can provide relief. Unfortunately, financial hardship doesn't stop the moment your bankruptcy request is approved in court. There's still a complicated course to navigate, one littered with questions about which assets you'll be allowed to keep and which assets you'll surrender to creditors.
Depending on the type of bankruptcy you file, your debts may be either discharged (forgiven) or all or a portion of them paid over time. To satisfy the money you owe, a court-appointed bankruptcy trustee may sell some of your property and use the funds to help pay your debts. Which property can be sold? It all depends on whether the property is classified as exempt or nonexempt, according to state or federal bankruptcy code. Items that fall under the state and federal bankruptcy exemption guidelines are protected from sale; these items remain with you, even if you still owe money on the assets. However, if you don't own the items free and clear, you must continue to make payments or your property can be seized by the lender.
The bankruptcy court will appoint a trustee charged with liquidating your nonexempt assets that are free and clear of liens, or claims by other creditors [source: United States Courts]. Nonexempt items include cash, bank accounts, stocks, bonds or investments, as well as valuable collections, family heirlooms and pricey musical instruments (unless you make a living as a musician). Vehicles -- other than one, primary vehicle used for transportation -- and vacation homes are also nonexempt.
The court trustee cannot sell items that are exempt. These include many of the tangible items that you need for everyday life, such as a vehicle; clothing; household goods, appliances and furnishings; jewelry; and tools of a professional trade. Pensions, Social Security, unemployment, and public benefits are also exempt from sale during a bankruptcy proceeding. In addition, any damages awarded for personal injury are off limits [source: Find Law].
Exempt property includes all or a portion of the equity in your home, depending on the exact specifications of the homestead exemption determined by the state in which you reside. The equity in question is the amount of the home owned free and clear. For instance, a home valued at $200,000 with a $150,000 mortgage would have $50,000 in equity [source: United States Courts].
Can a trustee sell your exempt assets in bankruptcy? The short answer is "no." But there are exceptions to every rule. A trustee may petition the court to sell exempt items to pay creditors. Or you may want to sell exempt items. For example, either can petition to sell the home even though it is exempt. Court trustees seeking to sell the home must petition the court, which will determine whether the sale will create undue hardship. If you want to sell your home, you must file a Motion to Sell Real Property to obtain permission from the court first [source: Pirraglia]. That's because when you file for bankruptcy, all of your assets become part of the bankruptcy estate, which the court controls [source: Weiss].
Because filing bankruptcy means navigating complex requirements with long-term consequences, working with a knowledgeable attorney is an important part of developing a financial game plan.