There are two issues that deal with the question of whether a debtor can keep luxury personal property in a chapter 7 case. The first deals with whether the debtor is able to fully exempt the equity of the property. The second relates to whether the property is financed and the payments are current.
A bankruptcy trustee only has the ability to take and sell the debtor’s personal property if the specific property cannot be fully exempt. If the property can be fully exempt, the trustee cannot take or sell the property. The bankruptcy code provides a list of exemptions that a debtor can apply towards different types of property. For example, the court allows a debtor to apply an exemption of $3,450.00 towards the value of an auto and up to $21,450.00 per person in connection with their residence.
To be more specific, the exemptions are applied towards the equity of each property. Equity is the difference between the value and the secured interest in the property. For example, property having a value of $10,000, with a financing payoff of $6,000.00, has equity of $4,000.00. The equity of property that is not financed is equal to the value of the property.
If an auto has a value of $3,000.00, the debtor can keep the auto because the auto is fully exempt after applying only $3,000.00 of the allowable $3,450.00 in auto exemptions. Each debtor may be able to apply an additional $11,975.00 of their unused portion of their residential exemption, towards any property or properties. If the $11,975.00 is available, it may be applied to a number of properties, until exhausted. In other words, any portion of the $11,975.00 may be applied towards as many properties as possible, until the entire amount is depleted. If the property is not financed and may be fully exempted, the debtor can keep the property.
The second issue relates only to luxury property that is financed. If the debtor is in default with the financing, the finance company will be permitted to repossess the property, after discharge, or, during the pending case, after permission from the court. Even though the creditor may pursue the repossession of the property, based on a default, depending on the property’s value and other circumstances, the finance company may not wish to repossess the property.
The code indicates that even if the debtor is current with the finance payments, the finance company will be permitted to pursue the repossession process, if the debtor fails to sign a reaffirmation agreement, that is approved by the bankruptcy court, within a certain time period. However, in reality, this is very unusual, if the debtor continues stay current with the payments.
Also, based on the criteria of a chapter 7, the debtor should not be able to pay the monthly financing payments on a luxury item.
New Jersey bankruptcy law expert Robert Manchel can be reached at 1 (866) 503-5655 to explain which property you can keep in a chapter 7. He can also answer any questions that you may have about filing for bankruptcy protection.