One of the biggest fears I hear from people who call my office is that if they file bankruptcy, they will lose everything they own. They worry about losing their house, their car, their furniture, their television, their computers, and even their cell phones.

I understand that concern. Many people have spent years working to acquire what they own, and the last thing they want is to file bankruptcy only to find themselves starting over with nothing.

The reality is that most people who file Chapter 7 bankruptcy do not lose any of their property. In fact, upwards of 98% of the Chapter 7 cases I file are what we call “no-asset” cases. That means the bankruptcy trustee does not take any of the debtor’s property to sell for the benefit of creditors.

In the relatively small percentage of cases where assets may be at risk, we can usually identify those issues before filing and discuss the available options. Depending on the circumstances, a Chapter 13 bankruptcy may be a better choice.

After practicing bankruptcy law for more than 35 years and representing more than 25,000 people, I have learned that understanding the difference between the myths and realities of bankruptcy can make an enormous difference in helping someone decide whether bankruptcy is right for them.

Myth No. 1: If I File Chapter 7 Bankruptcy, I Will Lose Everything I Own

Reality: Most Chapter 7 bankruptcy cases are no-asset cases.

When I file a Chapter 7 bankruptcy case, one of the first things I do is determine whether the client has any property that might be at risk.

Bankruptcy law allows debtors to protect certain property through exemptions. Depending on the circumstances, these exemptions may protect equity in a home, a vehicle, household goods, retirement accounts, and other property. Michigan debtors may have different exemption options depending on their eligibility and individual circumstances.

In most cases, the exemptions available to the debtor protect all of their property. When that happens, the Chapter 7 trustee has no nonexempt assets to liquidate for the benefit of creditors.

That is why upwards of 98% of the Chapter 7 cases I file are no-asset cases. My clients generally keep their belongings, subject to any separate issues involving secured debts, such as a mortgage or car loan.

A no-asset case does not mean that the debtor owns nothing. It means that the trustee has no assets available for distribution to creditors after accounting for applicable exemptions and other relevant considerations.

Myth No. 2: The Bankruptcy Trustee Will Take My Furniture, Television, Computer, and Cell Phone

Reality: Trustees are generally much more interested in valuable nonexempt assets than ordinary household belongings.

A Chapter 7 bankruptcy trustee has a legal responsibility to review the debtor’s financial circumstances, identify property that belongs to the bankruptcy estate, and determine whether there are assets that can be sold for the benefit of creditors.

However, that does not mean the trustee is interested in taking everything in your home.

In my experience, trustees are generally not interested in ordinary household furniture, used televisions, everyday electronics, cell phones, and personal computers. These items often have relatively little resale value, particularly when their condition, age, and the costs associated with selling them are taken into account. Applicable exemptions may also protect some or all of their value.

Instead, trustees are more likely to focus on assets that could produce a meaningful recovery for creditors.

Examples include:

• Real estate: Is there equity in a home, rental property, vacant land, or other real estate that is not protected by applicable exemptions?
• Lawsuits and personal injury claims: Does the debtor have a pending personal injury lawsuit, or a potential claim arising from an accident that has already occurred?
• Inheritances: Is the debtor entitled to an inheritance, or could an inheritance become payable within the applicable bankruptcy-law period?
• Life insurance proceeds: Is the debtor entitled to proceeds because someone has passed away, and are those proceeds property of the bankruptcy estate?
• Bank accounts and investments: Are there funds, stocks, bonds, or other investments that are not fully protected by exemptions?
• Other valuable property: Does the debtor own valuable collectibles, business interests, or other assets that could be sold?

These are the kinds of issues that deserve careful attention before a bankruptcy case is filed.

Of course, every case is different. A trustee’s decision depends on the actual assets involved, their value, applicable exemptions, potential costs of liquidation, and other relevant legal considerations.

Myth No. 3: I Should Leave Some Property Off My Bankruptcy Papers So the Trustee Does Not Find It

Reality: Bankruptcy requires full disclosure of your assets, whether you believe they have value or not.

This is extremely important.

When you file bankruptcy, you must disclose your assets and financial interests truthfully and completely. You should not omit property simply because you believe it is worthless, insignificant, or something the trustee would never want.

For example, you may have a personal injury claim that has not yet been filed in court. You may own a vehicle that you believe is worth very little. You may have an interest in an estate that has not yet been distributed. You may own a piece of property that has sentimental value but little resale value.

These matters still need to be disclosed when required.

The same principle applies to potential claims. If you were injured before filing bankruptcy, the fact that you have not hired a lawyer or filed a lawsuit does not necessarily mean the claim can be ignored. Potential claims can be assets of the bankruptcy estate even when their value is uncertain.

Failing to disclose an asset can create serious problems, including objections to discharge, loss of property, or other legal consequences.

The safest approach is to disclose everything to your bankruptcy attorney and let the attorney determine how the law applies. You should never decide on your own that an asset is too small, too uncertain, or too unimportant to report.

Myth No. 4: If I Have an Asset That Is Not Exempt, I Have No Choice but to Lose It

Reality: Depending on the circumstances, we may be able to protect the asset through a settlement or by filing Chapter 13 bankruptcy instead.

This is where having an experienced bankruptcy attorney can make a substantial difference.

In the relatively small percentage of Chapter 7 cases I file that involve assets that may not be fully exempt, we generally know about those issues before the bankruptcy petition is filed.

We can review the property’s value, determine which exemptions may apply, evaluate the amount of any secured debt, and estimate whether there is meaningful nonexempt equity available to the trustee.

Sometimes, the analysis establishes that the asset is fully protected after all. In other cases, there may be nonexempt equity that the trustee could seek to administer.

When that happens, we may be able to negotiate a settlement with the trustee. Depending on the facts, a settlement may allow the debtor to retain property by paying an agreed amount to the bankruptcy estate. Any proposed settlement must be evaluated under the applicable bankruptcy rules and procedures.

In other situations, we may determine that Chapter 13 bankruptcy is the more appropriate option.

The important point is that an asset that may be at risk does not automatically mean you must surrender it. The available options depend on the asset, the amount of nonexempt equity, your financial circumstances, and the applicable law.

Myth No. 5: Chapter 13 Bankruptcy Means I Will Lose My Assets Too

Reality: Chapter 13 generally allows you to keep your property rather than turn it over to a trustee for liquidation.

Chapter 13 bankruptcy works differently from Chapter 7.

In a typical Chapter 7 case, the trustee can take and sell nonexempt property to pay creditors, subject to the Bankruptcy Code and applicable procedures.

In Chapter 13, the debtor generally retains their property and proposes a repayment plan lasting three to five years. The plan must satisfy the applicable confirmation requirements, including rules governing what unsecured creditors must receive.

This distinction can be particularly important when someone owns valuable property that is not fully protected by exemptions.

For example, suppose you own a home with substantial equity that exceeds the available homestead exemption. If you file Chapter 7, the nonexempt equity could put the home at risk of being sold by the trustee, depending on the circumstances.

Chapter 13 may provide a way to keep the home while paying creditors through a court-approved plan. The amount that must be paid to unsecured creditors will depend on several factors, including the amount of nonexempt equity, your income, expenses, and other applicable bankruptcy requirements.

The same general concept can apply to other valuable property.

In Chapter 13, you generally do not turn your assets over to the trustee for liquidation. You retain control of your property while making plan payments, although the bankruptcy court and trustee have oversight responsibilities, and certain transactions may require approval.

Chapter 13 is not automatically the best choice for everyone with nonexempt assets. The repayment plan must be feasible, and the financial cost of the case needs to be considered. But when preserving valuable property is a priority, it can be an important alternative to Chapter 7.

What Does a Chapter 7 Bankruptcy Trustee Actually Do?

Many people hear the word “trustee” and assume that the trustee’s job is to take their possessions. That is not an accurate description of the entire role.

A Chapter 7 trustee is appointed to administer the bankruptcy estate in accordance with federal bankruptcy law.

Among other responsibilities, the trustee generally:

• Reviews the debtor’s bankruptcy schedules and financial information.
• Conducts the meeting of creditors, commonly called the 341 hearing.
• Asks questions about the debtor’s income, assets, debts, and financial transactions.
• Investigates whether the bankruptcy estate has property that can be administered for creditors.
• Reviews potential issues involving transfers of property, undisclosed assets, and other transactions when appropriate.
• Collects and liquidates nonexempt estate assets when warranted.
• Distributes available funds to creditors according to the Bankruptcy Code.

The trustee does not simply decide that they want a particular item and take it. The trustee’s authority is governed by bankruptcy law, and the administration of assets is subject to applicable exemptions, procedures, and court oversight.

In many cases, after reviewing the debtor’s circumstances, the trustee determines that there are no assets worth administering for creditors. That is how a case can be completed as a no-asset Chapter 7 bankruptcy.

Why We Review Your Assets Before Filing Bankruptcy

One of the most important parts of preparing a bankruptcy case is identifying potential asset issues before the petition is filed.

When someone comes to my office, I want to understand not only how much debt they have, but also what they own, what their property is worth, what debts are secured by that property, and which exemptions may be available.

For example, I may need to determine:

• How much equity you have in your home after accounting for mortgages and other relevant liens.
• Whether your vehicle equity is protected by the applicable exemption.
• Whether you have valuable assets that need further evaluation.
• Whether you have a pending or potential personal injury claim.
• Whether you have received an inheritance or may be entitled to one.
• Whether life insurance proceeds or other funds may be relevant to the bankruptcy estate.
• Whether recent transfers of money or property could create complications.

We also need to consider the timing of the filing. Certain assets and financial events can have consequences under bankruptcy law even if they seem unrelated to your debts.

For example, the Bankruptcy Code contains specific rules concerning inheritances acquired within 180 days after filing. Other rules may apply to property interests and claims that arise before or during the case. These issues need to be evaluated based on the particular circumstances.

The purpose of this review is to avoid surprises and determine the most appropriate way to proceed.

Chapter 7 or Chapter 13: Choosing the Right Bankruptcy

There is no single answer that works for everyone.

For someone whose assets are fully protected by exemptions, Chapter 7 may offer a relatively straightforward way to discharge qualifying debts without surrendering property to the trustee.

For someone with substantial nonexempt equity, Chapter 13 may be a better alternative because it generally allows the debtor to retain property while satisfying the applicable repayment requirements.

In some cases, a negotiated settlement with a Chapter 7 trustee may also be worth considering.

The decision requires more than simply comparing the amount of debt with the value of the assets. We need to consider income, expenses, secured loans, exemptions, the nature of the property, the client’s goals, and whether a Chapter 13 plan is financially realistic.

Filing the wrong type of bankruptcy without properly evaluating these issues can create unnecessary risks.

That is why I strongly recommend speaking with a bankruptcy attorney before filing, particularly if you own a home with significant equity, have valuable investments, are involved in a lawsuit, or have questions about an inheritance or other potential asset.

The Bottom Line: Bankruptcy Does Not Mean You Lose Everything

The idea that filing bankruptcy automatically means losing everything you own is one of the most persistent myths about bankruptcy.

In my practice, upwards of 98% of the Chapter 7 cases I file are no-asset cases. In the other cases, we generally identify potential asset issues before filing and evaluate the available options, which may include applicable exemptions, a settlement with the trustee, or Chapter 13 bankruptcy.

Bankruptcy is intended to provide financial relief to people who need it. It is not a requirement that everyone who files give up all their possessions.

However, protecting your property starts with understanding the law and properly preparing your case. The exemptions available to you, the value of your assets, and the type of bankruptcy you choose can all make a difference.

I have spent more than 35 years practicing bankruptcy law and have represented more than 25,000 people. One of the most important things I do for my clients is help them understand their options before they make a decision that affects their financial future.

If you are considering bankruptcy and are worried about losing your home, car, savings, or other property, I encourage you to get legal advice before filing. An experienced bankruptcy attorney can review your circumstances, explain which exemptions may be available, and help you determine whether Chapter 7 or Chapter 13 is the better fit for your situation.

You may have more options than you think. The key is to understand those options before you file.

Attorney Walter Metzen — Law Offices of Walter Metzen

If you are considering bankruptcy in Michigan, contact my office to discuss your circumstances and the options that may be available to you.