What Property Can You Keep in a Chapter 7 Bankruptcy?

One of the biggest fears people have about Chapter 7 bankruptcy is losing everything they own. Television and movies have painted a picture of bankruptcy trustees showing up at your door and hauling away your furniture, your car, and everything else. That is not how it works in practice, and it is certainly not what happens for the vast majority of Chapter 7 cases filed in Pennsylvania.

The bankruptcy code includes a system of exemptions that protect certain types of property up to specified dollar amounts. If an asset falls within an exemption, it is yours to keep. Understanding these exemptions is a big part of what we do when preparing a Chapter 7 case at our office.

How Exemptions Work in Pennsylvania

When you file for Chapter 7, a bankruptcy trustee is appointed to review your assets. The trustee's job is to identify any non-exempt property that could be sold to pay your creditors. Property that qualifies for an exemption is off the table.

Pennsylvania allows filers to choose between two sets of exemptions: the federal exemptions or the state exemptions. This is actually a benefit, because you can pick whichever set protects more of your property. Not every state gives you this choice, so Pennsylvania filers have an advantage here.

You must choose one set or the other. You cannot mix and match individual exemptions from both systems. An experienced attorney will compare both sets against your specific assets and recommend the option that gives you the most protection.

Your Home and the Homestead Exemption

For homeowners, the homestead exemption is usually the most important one. Under the federal exemptions (which most Pennsylvania filers choose), each individual can protect a set amount of equity in their primary residence. For married couples filing jointly, that amount doubles.

Equity is the difference between your home's market value and what you owe on the mortgage. If your home is worth $200,000 and you owe $185,000, you have $15,000 in equity. As long as that equity falls within the exemption amount, your home is protected.

Many homeowners in the Pittsburgh area, especially those dealing with financial hardship, have little equity in their homes. If you are underwater on your mortgage or have very little equity, the homestead exemption will more than cover it. Even if you have moderate equity, the federal exemption amount is often sufficient.

Vehicles, Retirement Accounts, and Personal Property

Vehicles. The federal exemptions provide a per-person exemption for motor vehicles. This covers the equity in your car, not the total value. If you owe $12,000 on a car worth $14,000, you only have $2,000 in equity to protect. Most people can keep their vehicles without any problem.

Retirement accounts. This is good news for anyone worried about their 401(k), IRA, or pension. Qualified retirement accounts receive very strong protection in bankruptcy. ERISA-qualified plans like 401(k)s and pensions are fully exempt with no dollar limit. IRAs and Roth IRAs are protected up to a generous cap that is adjusted periodically for inflation.

Household goods and furnishings. Your furniture, appliances, clothing, and everyday household items are protected per item under the federal exemptions. The trustee is not going to take your couch or your kitchen table. These items have minimal resale value, and the exemptions are more than adequate to cover them.

Tools of the trade. If you need specific tools or equipment for your job or profession, those items receive their own exemption. This protects mechanics' tools, a carpenter's equipment, or a professional's necessary work items.

Bank accounts and cash. Cash on hand and money in bank accounts can be partially protected using a wildcard exemption. This is a flexible exemption that can be applied to any type of property, including cash. The federal wildcard exemption also includes an unused portion of the homestead exemption, which can make it quite valuable for renters.

The Wildcard Exemption

The wildcard exemption deserves special attention because it gives Pennsylvania filers significant flexibility. Under the federal exemptions, there is a base wildcard amount that can be applied to any property. On top of that, you can add any unused portion of your homestead exemption to the wildcard.

For example, if you are a renter and do not need your homestead exemption at all, the unused portion gets added to your wildcard. This can result in thousands of dollars of additional protection that you can apply to bank accounts, tax refunds, a second vehicle, or any other asset.

This is one of the main reasons the federal exemptions are usually the better choice for Pennsylvania filers, especially those who rent rather than own their home.

What About Property That Is Not Exempt?

In the rare cases where someone has non-exempt property, there are still options. You might choose to file under Chapter 13 bankruptcy instead, which lets you keep all of your property while repaying a portion of your debts over time. Or you might negotiate with the trustee to pay the value of the non-exempt asset in cash to keep the property.

The reality is that the vast majority of Chapter 7 cases are what attorneys call "no-asset cases." That means the trustee finds no non-exempt property to liquidate, and the filer keeps everything. If you are living paycheck to paycheck and your main assets are a used car, basic household goods, and a retirement account, it is very likely that all of your property is fully protected.

The key is getting an accurate picture of your assets and their values before you file. At Bryan P. Keenan & Associates, we go through everything during your initial consultation so there are no surprises. We want you to know exactly what to expect before any paperwork gets filed.