One of the biggest misconceptions about bankruptcy is the fear that you will lose everything you own. Many believe filing for bankruptcy means their possessions will be sold to pay off creditors, especially when they read about the “liquidation” process. This false belief can scare people away from seeking the relief they deserve during financial distress. As a bankruptcy attorney with over 30 years of experience, I am here to set the record straight.
The Truth About Bankruptcy and Asset Liquidation
A common myth that persists is that in a Chapter 7 bankruptcy, your assets will be liquidated (sold off) to pay creditors. However, this is simply not true. In reality, only about 3% of Chapter 7 cases involve liquidating assets, including corporate bankruptcies.
While bankruptcy laws allow for the sale of nonexempt assets, this doesn’t usually happen. There are three main reasons why most people do not lose their possessions during bankruptcy:
- Exemptions: Bankruptcy exemptions allow you to keep certain assets. These exemptions vary by state but are designed to protect essential property, such as a primary residence, vehicle, or personal belongings.
- Nonexempt Assets Have Little or No Value: The nonexempt assets that might be considered for sale often have no meaningful sale value. If the trustee (the bankruptcy official managing the case) determines that an asset will not provide enough money to pay creditors, the asset will not be sold.
- Choosing Chapter 13: For those with significant assets, Chapter 13 bankruptcy allows you to keep and repay your creditors over time, which may prevent asset liquidation.
What Happens to Your Assets in Chapter 7 Bankruptcy?
In a Chapter 7 bankruptcy, the trustee is responsible for reviewing your assets to determine if any can be sold for the benefit of your creditors. However, there is a critical rule: any asset sold must result in a “meaningful” distribution to creditors. In many cases, this simply does not happen.
If the trustee determines that selling an asset will not yield significant proceeds, they will abandon the asset, and it will be returned to the debtor. This happens regularly, and most bankruptcy cases are quickly labeled as “no asset” cases, meaning no assets are sold.
Why Does This Myth Persist?
There are a few reasons why the bankruptcy continues to circulate:
- Fear Tactics: Some may perpetuate this myth to scare consumers away from filing for bankruptcy, leading them to believe the process will result in losing everything they own.
- Lack of Education: Many people simply are not educated about the specifics of Chapter 13 bankruptcy, which allows individuals to keep their assets while repaying creditors.
- Bankruptcy “Experts” Spreading Misinformation: Some well-known figures, such as financial advisor Dave Ramsey, have contributed to this misconception by wrongly claiming that Chapter 7 leads to asset liquidation. Unfortunately, this has caused many to avoid bankruptcy and remain financially distressed.
The Importance of Professional Guidance
Rather than relying on online information or advice from non-experts, it’s crucial to speak with a bankruptcy professional who can help you understand the specifics of your situation. Bankruptcy laws are complex, and every case is unique. As a bankruptcy attorney, my role is to combat misinformation and educate my clients about their options and help them find a path toward financial relief.
Seeking Help Does Not Mean You will File for Bankruptcy
If you are facing financial distress, do not let the fear of losing everything hold you back. Consult with a bankruptcy lawyer to explore your options. Seeking a consultation does not mean you have to file for bankruptcy. It simply means you are taking the first step toward understanding your rights and how you can achieve financial stability.
My name is Lee Perlman, and I am a New Jersey bankruptcy attorney. If you or someone you know is struggling with financial challenges, I offer free consultations to help you make an informed decision about your future.
Do not let the fear of losing everything stop you from taking control of your financial situation. Reach out today and start understanding your options.