People hard hit by the prevailing price of a barrel of oil are starting to wonder if they are about to lose everything. Bankruptcy seems like an impossible alternative after years of hard work acquiring things especially when the current down turn “just can’t last.” Fortunately, for those who qualify, Chapter 13 bankruptcy can be an effective means to reorganize without having to suffer losses due to untimely disposition of non-exempt equities.
To understand this comment, we have to begin with looking at what the word “exempt” means. Since colonial times the law has provided that no matter how much debt someone has there are certain things that just should not, and legally cannot, be taken away from someone. In the old days this list of things included a cow, a pig, a sheep, a spoon and bowl, a comfortable bed, a chair and table, and, a pew in a meeting house.
Modern exemptions cover a wide array of properties and, for most middle class homeowners, very little if anything is actually turned over in a bankruptcy for administration in the case. But, for people who have second homes, or rent houses, or investments outside of qualified retirement plans, the law works in favor of creditors and only allows the debtor to keep these properties if they contribute the net equity value of them to payment of their creditors. In a Chapter 13 reorganization this can be done over 3 to 5 years. In a Chapter 11 case this repayment can be scheduled for a significantly longer period.
So, filing for Bankruptcy does not have to mean losing everything that has come as a result of years of hard work. But, Debtors should not expect to be able to just walk away from debt if they also want to keep non-exempt assets.