Filing for bankruptcy is often treated as a last resort for those overwhelmed by debt, partially because there’s a common misconception that it can lead to the loss of all of one’s personal assets. Thankfully, this is not accurate.
Bankruptcy laws are designed not just to relieve debtors of their financial burdens, but also to allow them a chance to rebuild their financial future. Understanding how bankruptcy works can help to shed light on why the myth that this process can cost individuals everything they own is not grounded in reality.
Bankruptcy basics
While Chapter 7 bankruptcy is often referred to as “liquidation bankruptcy,” it very rarely leads to the liquidation of any assets, and it never leads to the liquidation of all of a filer’s assets. Legal exemptions protect many assets, like a portion of the equity in a filer’s home, basic household goods, a vehicle up to a certain value and retirement accounts. Only particularly valuable non-exempt assets are at risk of being sold during a Chapter 7 bankruptcy case.
By contrast, Chapter 13 bankruptcy, often known as a “wage earner’s plan,” doesn’t require selling any assets. Instead, it involves creating a repayment plan to pay back all or a portion of a filer’s debts over time — usually three to five years. Under Chapter 13, debtors can keep their property, including non-exempt assets, as long as they adhere to their repayment plan.
The primary goal of bankruptcy is to give people burdened by debt a fresh start. This doesn’t mean leaving them with nothing. Instead, it provides a structured way to handle overwhelming debt while retaining enough to start anew.
