If I Go Bankrupt What Happens To My Stuff?
Bankruptcy and Your Assets
A common question I am asked is “Will anyone come to my home and take my TV, computer, etc?” No, you will not get an unexpected knock on your door, no one will come to your house to go through your things. All of your normal household furniture and personal effects are protected in bankruptcy the exception being valuable antiques or other assets of high value.
In the world of bankruptcy, assets are divided into two categories Protected assets and Unprotected assets. Protected assets include your superannuation that has been accumulated over time, tools of trade up to $3,950 auction value, Motor vehicle with equity up to $8,550 and household items, furniture, white goods and electronics. As the name suggests protected assets are yours to keep.
Everything else is considered an Unprotected Asset this includes shares, investments, caravans, boats, houses including principal residences, trailers, and motor vehicles where the equity in the vehicle exceeds $8,550.
Many people are confused by the term equity, equity simply means the portion of the asset that belongs to you. If you own a car worth $20,000 and the car is secured by a loan of $5,000 then you would have $15,000 equity in the car. The bank owns $5,000 of the car and you own $15,000, this $15,000 is your equity.
As I mentioned when bankrupt you can own $8,550 of equity in a car. The difference between your equity and the vehicle threshold $8,550 is the unprotected portion of the vehicle. After bankruptcy the vehicle in this example then has three components to its ownership there is the loan amount which the bank owns, there is the protected amount which the bankrupt owns, and then there is the unprotected amount that vests in the bankrupt estate. The trustee will work with you to keep the car if that is what you would like to do. The trustee will ask if you have a non-bankrupt family member or trusted friend who can assist by purchasing the unprotected amount from the bankrupt estate. A good trustee will work with all parties and allow the unprotected amount to be paid off over time.
Note: the protected threshold amounts are adjusted with the CPI the “protected amount” in the example is for demonstration purposes and may not be current.
What if the asset is jointly owned?
Any unprotected asset or any unprotected portion of an asset belongs to the bankrupt estate once you become bankrupt. Let’s say you jointly own a camper trailer with a nonbankrupt partner. The camper trailer is worth $10,000 with no debt attached to it. So your share of the trailer is $5,000. When you become bankrupt, your share of the camper trailer effectively belongs to (vests in) the bankrupt estate. Now the bankrupt estate does not want to own half a camper trailer, it wants the $5,000 so it can make distributions to creditors. To turn the camper trailer into money, the trustee could sell the camper trailer give $5,000 to your partner, and put your $5,000 into the bankrupt estate. Alternately, if you have a trustee that will work with you, the trustee could negotiate with your nonbankrupt partner, sibling, trusted friend, or family member to purchase your vested equity in the asset back from the bankrupt estate. That way you and your family can retain the use of the camper trailer and the bankrupt estate gets its money. If you have a trustee that is willing to work with you they may be flexible on the timing of the repayments of the $5,000 (for more information on assets see our can I own anything article).
Ok then what about it there is no equity in the unprotected asset?
Good point! If you have an asset that is worth less than the debt on the asset then the asset is said to have negative equity. Let’s say you have a car worth $60,000 but the debt on the car is $85,000. In this case, there would be no point in the trustee selling the car because they would get enough to clear the debt. So you can keep the car provided your repayments are kept up to date. Most lenders do not care if you are bankrupt as long as you keep the repayments current they will be happy to let you keep the car. After all, if they repossessed the car and sold it they would make a $15,000 loss, it is much better for them that you continue to make repayments and then they get all of their money (for more information on cars and bankruptcy).
What if I pay the car off and now it has positive equity?
Once the car goes into positive equity the usual rules apply i.e. you can’t have more than $8,100 equity. Usually, with cars, the value of the car falls faster than the loan balance which keeps the car in negative equity and this does not become an issue.
How does this work with my house?
While the same principles apply, dealing with a house is more complex and there are a few other options open to you. If you have a house give me a call for a full explanation of how you can stay in your home while you are bankrupt.