Chapter 7 bankruptcy does not mean loss of all of your property

In a Chapter 7 or liquidation bankruptcy, the debtor who files for relief in U.S. Bankruptcy Court is allowed to keep so-called exempt property. Some people misunderstand that if they file for bankruptcy they will lose everything. Bankruptcy law allows people to keep certain kinds of property considered basic and necessary to living.

This makes sense, considering that the purpose of bankruptcy is to give people experiencing serious financial problems fresh starts and allow them to get back on their feet, not to send them into poverty.

Very broadly, a Chapter 7 (of the U.S. Bankruptcy Code) bankruptcy is called a liquidation bankruptcy, which means that the debtor's property that is not exempt will be sold to pay off the person's eligible debts. If there is not enough money to pay off all eligible debts, the remaining debts will be discharged (extinguished).

(The law is much more complex than this simplified version, but we provide a broad overview for purposes of illustration. An attorney can answer questions in more detail.)

What kinds of property are exempt from being sold to pay debts?

The answer to this question is: it depends on your state's law. Federal bankruptcy law provides a list of exempt property in a Chapter 7 case. Each state has its own list of exempt property. Each state has chosen either to opt out of the federal exemptions, which means only the state exemptions are available to debtors in that state, or else to let the debtor choose between the federal and state lists.

New Mexico allows a choice between federal and state exemptions in Chapter 7. Depending on the circumstances, the choice, which determines what property the debtor will still own when the bankruptcy is over, can be complicated.

It is important to go carefully through the two exempt-property lists in light of the kinds of property the debtor owns in order to make the federal or state choice with the guidance of an experienced bankruptcy lawyer.

The federal and New Mexico exempt property lists are complicated, but each makes exempt some level or type of interest in a homestead, a modest car, certain kinds of personal property (like clothes, furniture, jewelry and more), medical equipment, some interests in life insurance and more.

An attorney should be consulted to understand exempt property issues in Chapter 7.

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