I am surprised by the number of people who ask me if they will be “allowed” to keep their house or their car if they file bankruptcy. If these people were owners of mortgage-free mansions or paid off Lamborghinis, I would understand the question. But most of these people have houses that are under water and cars that are not worth what they owe on them. What they are worried about is that they will be punished if they file bankruptcy by not being allowed to keep their property. Bankruptcy simply does not work that way.
Nothing in the bankruptcy code is designed to punish people simply for getting into financial distress. Quite the contrary, the bankruptcy code is designed to help people in financial difficulty. Outside of the bankruptcy code, the law is extremely favorable to banks. There is an understanding that the bankruptcy law is necessary to help people who would otherwise be crushed by their debts.
In terms of property, the approach of the bankruptcy code is not punitive. Instead, the Bankruptcy Court appoints a Trustee. It is the Trustee’s job to look for valuable things which the Debtor may have that the Trustee could then sell and have some money to give to the people who are otherwise not going to get paid. So right off the bat, if the house is under water or for car has little or no equity in it, it is not something a trustee would be interested in. On top of that, the bankruptcy code allows people keep equity in a certain amount of property. For example, in Massachusetts most people can keep $500,000 of equity in their home. Given the recent housing crisis, very few people have more than $500,000 of equity in their home, and those people generally are not filing bankruptcy. Similarly, in Massachusetts each debtor is allowed up to $7500 of equity in their vehicle. Once again, very few people who purchased their cars with the benefit of a car loan, have such equity. Retirement plans are usually completely exempt. So too are most personal items such as clothing and furniture, and even a small bank account. As such, it is rarely the case that the Trustee in bankruptcy takes something from a Debtor. In addition, it is almost never the case that the Trustee has taken something from Debtors to punish them. There are exceptions for situation where the Debtor has simply lied about its finances, but that is a completely different situation. No one would ever take the position that simply because the Debtor is in bankruptcy, they should lose their property.