Filing for Bankruptcy: What Can You Protect?

By the end of the year, more than 1.6 million people are expected to have filed for personal bankruptcy, according to the American Bankruptcy Institute. Almost 65% of filers chose “income reduction” as a reason for filing, while 42% listed “job loss” as a reason (debtors can choose more than one).


Filers who have been conscientious borrowers and consumers will often have equity in their homes, possess cars that are partly or fully paid for, and hold savings accounts designed to provide for them in the future. But there’s no credit for being responsible when it comes to bankruptcy court — and the more responsible a consumer has been, the more they have for a trustee to take and sell off to pay creditors. Bankruptcy doesn’t care that they’ve been good Samaritans.
What and how much someone in bankruptcy can keep depends mostly on where they live. Florida millionaire Burt Reynolds was able to keep his 160-acre ranch through his bankruptcy – a feat that would be impossible in, say, neighboring Georgia. And there are a number of exemptions and loopholes in each state that allow consumers to hold onto some assets. Among them is the federal “wild card,” a credit of up to about $12,000 per person, which in 16 states and Washington, D.C. can be used to help a consumer keep items like cars or jewelry. (Some states have their own wild card options, but they’re far less generous.)  Florida's is $4,000.  There are also assets that bankruptcy trustees aren’t interested in taking because they won’t yield profits to pay creditors — like a home or car, if the filer owes more it’s worth.


A home
Holding on to your home depends on the state you live in and the equity in your house. Florida residents can keep up to 160 acres outside of city limits and the home that’s on it, or up to half an acre and a home in cities. Texans can protect up to 200 acres of rural property or up to 10 acres in the city. And in general, if a home is worth less than the mortgage balance – that is, the owner has no equity – the owner can keep it as long as the payments stay current.

For filers who do have equity, most states offer an exemption — money from the trustee’s sale of the home that stays with the homeowner. But over that amount, every penny of a sale is applied to outstanding debts and paying the trustee.


Tax-exempt retirement funds
Most tax-exempt retirement funds, like 401(k)s and individual retirement accounts, are out of reach from creditors. IRAs are protected up to about $1.17 million per person.

But trustees view these accounts skeptically and will flag suspicious actions like dumping cash and investments – which are usually not protected in full in bankruptcy – into retirement plans

Car

Holding on to a car depends on several factors, including what’s covered by state exemption. In general, as with a house, owners who owe more than the value of the car can generally keep it, as long as payments stay current. Free-and-clear car owners can keep a car if it’s worth less than the state exemption, but drivers who have a car loan and some equity in their car can see their vehicle seized and sold, and recoup only their equity up to the exemption.

Life insurance policy

Term insurance policies are safe after bankruptcy, but whole-life insurance policy holders aren’t always so lucky: These policies are considered an investment vehicle.
Depending on the state, there could be exemptions – Florida protects the entire policy, other states only protect a fraction.

College savings

The fate of the balance of a 529 plan depends on several factors. If a 529 plan is less than two years old, protection is limited to $5,000; creditors can take what’s been saved beyond that. The same mostly holds true for a Coverdell account. But after that two-year period, the plan is safe, as long as the person filing for bankruptcy is not the beneficiary; the account is not safe if the beneficiary is not the child or grandchild. If the filer is the beneficiary — for example, a 30-something with leftover college savings earmarked for grad school — trustees could cash out the 529 plan to pay creditors.


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