Chapter 7 bankruptcy law allows people to ask a judge to discharge a large chunk of certain types of debts so they can financially recover. The big trade off in that process is that the judge will appoint a trustee to look out for the interests of your creditors. To that end, the trustee is authorized to sell your non-exempt assets and use the proceeds to pay something to the creditors before the difference is settled. You may rightly wonder what assets you stand to lose in this process. Let's take a look at how the process works and what the implications may be for your ability to hold onto assets.

Exempting Assets

The trustee is only authorized to sell non-exempt assets. What does that mean? A bankruptcy petition should list all of your assets. Likewise, you're allowed to ask the court to exempt certain assets from sale. Generally, your exempt assets are things that serve a practical purpose. For example, your everyday clothes are exempt. If they serve a work purpose, even nicer wardrobe items might be exempt. Similarly, you can expect an exemption of a reasonably practical car that's a daily driver. Kitchenware, furniture, and even your main residence might be exempt. Bear in mind, though, the court has broad leeway to reject exemption requests. If you try to claim a luxury car as a daily driver, for example, the court has the power to sell it and give you part of the proceeds to buy a more practical ride. Conversely, some states allow you to exempt assets of all types up to certain limits. If you can squeeze everything under the limit, you could, at least in theory, not lose any assets.

Dealing with Secured Assets

A secured asset is a debt, usually a loan or mortgage, that's backed by a piece of property. Cars and houses are by far the most common assets in this category, although anything you put up for collateral to secure a loan probably counts. Under chapter 7 bankruptcy law, secured assets are repossessed by the creditors that own the debts. It may be possible, however, to do a second Chapter 13 petition that allows you to restructure those debts while also getting a discharge for other debts under Chapter 7.

The Trustee's Recommendation

While the judge has the final say, the vast majority of decisions hinge on recommendations from the assigned trustees. Once a list of non-exempt assets is produced, the trustee will proceed with the sale.