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Will I lose my personal property if I file bankruptcy?

Bankruptcy regulations determine what property will be kept or will be lost.

Perhaps the biggest worry for someone who is considering filing bankruptcy is the fear that they will lose everything they own.

Under Chapter 7 of federal bankruptcy regulations, the most common form of personal bankruptcy, the court doesn't allow individuals to keep their assets. But there are many exemptions allowed under state and federal law that are usually large enough to cover the value of major possessions such as a house, car or furniture.

The point of bankruptcy is to free people who are overwhelmed by debt from further obligations, as long as they use all their assets not covered by exemptions to pay back their creditors. They are given a "fresh start," according to the U.S. Bankruptcy Court, but it may be a new start in which they give up some prized possessions.

"Even though every bankruptcy case has to be evaluated separately, it would be safe to say that in most cases the debtor does not have to give up their property or possessions," according to BankruptcyHome.com. "The reason for this is that the law allows a comfortable amount of property exemptions."

However, the website states that losses can occur when the exemptions allowed by law do not cover the full value of personal property, forcing the homeowner to sell it to pay debts.

In Chapter 13 bankruptcy, the approach is different. The individual agrees to a court-order repayment plan based on their income, expenses and what's left over to pay their creditors for three to five years. In exchange, the debtor is allowed to keep their property and belongings and the creditors are prevented from seizing those assets.

However, the court will not include debt payments on non-essential or luxury items in the repayment plan, so if the debtor cannot keep up with those installments the goods may have to be sold.

There is a middle ground that allows Chapter 7 filers to voluntarily pay mortgages or car loans - which cannot be discharged in bankruptcy - and other debts they don't wish to include in the court action. It's called reaffirming a debt, which allows debtors to continue making payments so they can keep their property rather than liquidate it to pay off creditors.

Bankrate.com states that one positive aspect of payments that are made under a reaffirmation agreement is that they are reported to credit bureaus and allow debtors to rebuild their credit rating more quickly once the bankruptcy is decided.

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