If you file for Chapter 7 bankruptcy, your property may be seized to pay your debts, including any cars or boats you may own. In order to give you a fresh financial start, both federal and state laws allow you to protect some of this property by claiming an exemption for them. However, if the value of your property is greater than the exemption limit, your car or boat may still be at risk. In this instance, you may be better off filing for Chapter 13 instead.
Property and Chapter 7
Individual debtors often apply for Chapter 7 bankruptcy. With this bankruptcy, the debtor's nonexempt assets are seized by a bankruptcy trustee and sold to pay the filer's debts. Nonexempt assets are property the debtor is unable to protect from seizure through either a federal or state exemption. Once the trustee finishes selling off assets and paying debt, the debtor receives a discharge. This extinguishes his liability for debts included int the bankruptcy, including those not fully paid when the discharge occurs.
Protecting Property With Exemptions
In order for a debtor to protect his cars and boats from seizure in Chapter 7, he must find an exemption for them. This is likely to be easier for cars than it is for boats, but it is possible. Exemptions are categories of property that a debtor may protect from seizure, but only up to a certain dollar value. There are both state and federal exemptions. Depending on where a debtor lives, he can either choose between them or must use state exemptions only. Vehicle exemptions can usually be found in both the federal and state exemption lists. For example, as of 2013, a debtor can exempt up to $3,675 of his car's value using the federal exemption. If he lives in Arizona, he can exempt up to $5,000. There is no boat exemption under federal law and many states also don't have such an exemption, but there may still be a way to protect this property.
Boats Can Be Tricky
When it comes to boats, finding an exemption for it can be more challenging. If the state where a debtor resides has a boat or recreational vehicle exemption, he may be able to exempt his boat using either of these. In states without these exemptions, a debtor may be able to exempt his boat if he uses it as his primary residence, such as a houseboat. If so, he may be able to claim the homestead exemption under either federal or state law. The federal homestead exemption is $22,975, as of 2013. If a resident is fortunate enough to live in a state like Florida where the homestead exemption is unlimited, he can exempt the entire value of his boat. Another possibility is using the tools of the trade exemption, which is available in both federal and many state laws. If the debtor's boat is used primarily or exclusively for business purposes, he may be able to exempt it using this exemption. The wildcard exemption is also available under federal law and in some states. This is an exemption the debtor can apply to whatever he wants.
Chapter 13 Alternative
If a debtor is unable to protect his vehicle or boat with an exemption or the exemptions available don't cover the full value of these items, the bankruptcy trustee will seize them. However, the trustee will give the amount protected by exemptions back to the debtor after the items are sold. The rest of the proceeds go to the debtor's creditors. If a debtor can't bear to part with his cars and boats, he can file for Chapter 13 instead. With Chapter 13, he gets to keep his property. However, he must enter into a repayment plan, paying some or all of his debts over a three to five year period.