When a Rockland County resident is considering filing a bankruptcy petition, one of the first questions is whether creditors can compel the forfeiture of certain assets, most commonly a car or the family home. The answer to the question is generally more positive than most people realize.
First, the laws of the United States and New York identify certain assets as exempt from the claims of creditors. A debtor must choose from one list or the other. Regardless of which list is used, exempt assets can include the homestead, up to a certain amount, a motor vehicle up to a specified value, reasonably necessary clothing, household goods and furnishings, household appliances, pensions, the tools of the debtor’s trade or profession and a portion of earned but unpaid wages. Some items are not exempt, such as a second vehicle, a second home or cabin, collections of stamps and other valuable items and cash on hand. These assets will remain in the debtor’s possession after the bankruptcy proceeding is completed.
A second means of preventing forfeiture is the so-called “automatic stay.” The automatic stay is a court order that is issued automatically upon filing of either a Chapter 7 or Chapter 13 petition. The stay prevents creditors from taking any action to collect a debt that existed when the petition was filed. For example, a bank cannot commence or continue a foreclosure proceeding even if the mortgage payments are delinquent. Similarly, the lien on an automobile loan cannot be executed once the automatic stay has issued. In a Chapter 13 proceeding, the status of such loans will be reviewed by the bankruptcy trustee and the debtor can decide which loans to bring current and which loans will remain delinquent. When a Chapter 13 proceeding concludes, the debtor must either pay certain loans according to the terms of the reorganization plan or allow the collateral to be repossessed by the creditor.
People with few assets will probably elect to pursue Chapter 7 bankruptcy, assuming their income is within the eligibility limits. In Chapter 13 proceedings, the use of exemptions and a thoughtful reorganization plan can save many assets from forfeiture.