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The Biggest Lie About Bankruptcy

By Cathy Moran

possessions are sold in bankruptcy

Read anything about Chapter 7 and you get, “Your possessions are sold in Chapter 7 bankruptcy.“

That is, flat out, the biggest lie about bankruptcy.

It’s a liquidation proceeding and your stuff will be sold to pay creditors, the lie goes on.

No wonder people are scared off from getting relief from debts they can’t pay.

But it’s simply not so: fewer than 3% of all Chapter 7’s result in the sale of any assets, and that includes corporate bankruptcies.

To be clear: the law allows for the sale of non exempt assets. But in the overwhelming number of individual cases, the trustee liquidates nothing: No possessions are sold in bankruptcy

Why no assets are sold

The reason no possessions are sold in bankruptcy is a combination of law and economics.

  1.   Your assets are protected by exemptions.
  2.   Your non exempt assets have no meaningful sale value.
  3.   You picked Chapter 13 where you keep your assets.

The trustee’s job is to determine if there is non exempt value in the debtor’s assets from which a meaningful dividend could be paid to unsecured creditors. The expectation is that secured creditors, those with a lien, can enforce their lien for themselves.

The trustee must be able to sell an asset, pay himself and the costs of the sale and have a pot of money left to pay creditors before he sells anything.

If he can’t produce meaningful money, he abandons the assets back to the debtor. Often that declaration that a case is “no asset” is issued the day of the first meeting of creditors.

Why the big lie persists

Despite those facts, too many sites on the web intone that in Chapter 7 “your assets are sold to pay creditors”. Like

Chapter 7. This type of bankruptcy essentially liquidates your assets in order to pay your creditors….But your remaining, non-exempt assets will be sold off by a trustee appointed by the bankruptcy court and the proceeds will then be distributed to your creditors. Investopedia

Chapter 7 means the court sells all your assets—with some exemptions—so you can pay back as much debt as possible. Dave Ramsey

The consequences of a Chapter 7 bankruptcy are significant: you will likely lose property. Experian

Again, the reasons for the lie are mixed.

Some of these writers are just lazy: they haven’t check the facts about what happens in real cases. Others have a profit motive in scaring people off from an effective means of regaining control of their financial lives.

Get good bankruptcy counsel

Leaving bankruptcy with all the assets you entered with may require planning and advice from a professional. Failure to understand exemptions and what is “property of the bankruptcy estate” is what turns no-lawyer cases into disaster zones.

True stories of exemption disasters

Note that the third reason that most individual bankruptcy cases are “no-asset” cases is that a good attorney was involved. The attorney either crafted some exemption planning or spotted that assets might be at risk and advised filing Chapter 13.

So, tune out the “you lose everything” garbage and get a good attorney to guide you to a fresh start.

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Filed Under: Consumer Rights

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

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About The Soapbox

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said "try").

Here, I allow myself to tell stories and express strong opinions on how I think law should work for the consumer and small businesses when it comes to debt.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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