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Bankruptcy and your possessions
Bankruptcy allows you to keep both the property you are making payments on and the property that is paid in full. The bankruptcy trustee can only take property that is not exempt from creditors. If you still owe money on a car, house, etc., only the equity subject to being taken by the trustee. The exemptions only apply to the equity, which is the difference between the value of the property and the debt that is secured by the property.
In Washington, you can use either federal or state exemptions. Exemptions are defined by state or federal law to protect your important possessions so you can guarantee your right to an effective fresh start in bankruptcy. There are several exemptions covering different kinds of property under both state and federal law. You can not mix state and federal exemptions on in your bankruptcy. You must choose one or the other.
It is extremely rare for anyone to lose household goods, jewelry, clothes, work tools or other things you might find in a garage sale. Exemptions almost always cover these items and, as a practical matter, no trustee wants to hold a garage sale. Retirement plans are 100% exempt. Federal law provides a “wildcard” exemption of up to $11,975 if you do not need to claim a homestead exemption – if you do not have any equity in your home. The state wild card is only $3,000 but the homestead exemption is $125,000. Both sets of exemptions provide around $3500 for a car. You can stack the wildcard exemption on top of other exemptions to protect more expensive cars, etc. The wildcard is usually used for things like cash, bank accounts, tax refunds, accounts receivable and inheritance. Sometimes it must be used for something like equity in a second home, if possible.
If you are still paying for a piece of property, you can keep the property if you just keep making the payments. In a Chapter 7 that usually means continuing to pay what the contract requires. However, you may be able to negotiate, especially for things like appliances, furniture and electronics. Mortgages never negotiate (though you can pursue a mortgage modification while in bankruptcy) and car finance companies rarely do.
Creditors will want you to sign a reaffirmation agreement for these secured debts in Chapter 7. A car company can repossess a car even if you are current, though some may not exercise that right. You can ask your car finance company what their policy is or your bankruptcy attorney may have some experience with what a particular creditor is likely to do. Because the reaffirmation agreement results in a debt not being included in the discharge, you should be careful about signing the agreement.
In a Chapter 13, you can restructure your debt and include installment payments in the plan. Chapter 13s also allow you to keep unexempt property that you would lose in a Chapter 7. You just have to pay unsecured creditors as much as they would have received if the property had been sold. You can spread those payments over five years rather than losing the property and paying the creditor something all at once.