Personal Finance
What You Keep in Bankruptcy: Exemptions, the Automatic Stay and Discharge
Bankruptcy attorney Barry Levine explains why most filers keep far more than they fear, how the automatic stay halts collection, and what creditors can still do.
Understanding Bankruptcy : Laws and Exemptions
Video from Barry Levine.
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What can you keep when you file for bankruptcy?
Most people keep most of what they own. Exemptions protect home equity, retirement accounts, annuities and vehicle equity, and they are the same in Chapter 7 and Chapter 13. The automatic stay stops foreclosures, garnishments and sales the moment a case is filed, and credit card and bank loan debt is usually discharged.
The fear that keeps many people away from a bankruptcy lawyer is simple: they assume filing means losing everything they own. Barry Levine, a Massachusetts bankruptcy attorney with more than four decades of practice, spends much of his working life explaining why that picture is wrong.
In a conversation with host Sam Heninger, Barry walked through the three ideas that decide how a filing actually feels for the person inside it. Exemptions decide what you keep, the automatic stay decides how quickly the pressure stops, and discharge decides which debts disappear for good.
His examples come from real cases: a separated couple with two houses, a landscaper with a yacht who filed again and again, and a local news story about a luxury condo. Each one shows that the law is more practical, and more forgiving, than most people expect.
Key takeaways
- Exemptions are the same in Chapter 7 and Chapter 13, and they protect most ordinary assets.
- A Massachusetts homestead can shield large amounts of home equity, but you must record it correctly.
- The automatic stay halts foreclosures, wage garnishments and sales from the moment a case is filed.
- Creditors can object to a discharge, but a judgment against someone with no money rarely pays off.
1. Exemptions decide what you keep
Barry starts with a point that surprises many clients: exemptions do not change between chapters. Whether someone files a Chapter 7 or a Chapter 13, the same exemptions apply. The difference is that a Chapter 13 plan has to show what unsecured creditors would receive if the assets were liquidated.
In Massachusetts, filers choose between the federal exemptions and the state exemptions. Homeowners usually take the state set, because the homestead can protect up to half a million dollars of equity, and up to a million for owners over 62, provided they record a new homestead after that birthday. Someone who does not own real estate can use the federal set to exempt up to about $28,000.
Beyond the house, most ordinary wealth is protected. Barry lists retirement accounts, IRAs, annuities and equity in a vehicle as exempt. What tends to be exposed is a sizable stock portfolio or a large cash balance, which is why the asset question is the first thing he works through with anyone thinking about filing.
2. The automatic stay stops the pressure
Barry calls the automatic stay one of the best parts of filing. Once a case is filed, creditors must stop any action against the debtor's property. His office still sends notice of the filing, but the protection does not depend on it, and it works against foreclosures, wage garnishments and even a sale by the IRS. That protection became automatic when the bankruptcy code was rewritten; before then, debtors had to tell creditors they had filed.
A creditor who wants to continue has to ask the court for relief from the stay. The debtor can respond, often by showing the lender is protected by enough equity, and the judge decides at a hearing. In his experience, judges are not looking to crush debtors and will often give them time to catch up.
The stay has limits. A serial filer can lose it: one client, once a landscaper with a yacht, filed repeatedly to block the sale of his home until the court ordered that any new case would lift the stay at once. For readers who want the whole process laid out, Barry's book Personal Bankruptcy Through The Looking Glass explains the ins and outs of bankruptcy in plain language.
3. What creditors and trustees can still do
Discharge means the debt is zeroed out and gone, and it covers most credit card debt and bank loans. Student loans are the usual exception, though Barry notes that non-guaranteed student loans can be discharged. Many business owners are also shocked to learn that the SBA loans handed out during the pandemic are dischargeable too.
Trustees are not there to punish anyone. They earn a small fee per case and make real money only when there are assets to sell, so they take the path of least resistance. A condo worth millions that carries an even larger mortgage offers them nothing, and Barry once saw a trustee sell a debtor's interest in a second home back to him at a discount.
A creditor's main weapon is a complaint objecting to discharge, based on fraud or on a debtor's failure to keep records. Barry calls it a hollow victory: a judgment against someone with no money is worth little. The bigger risk is personal liability, since many owners forget that their name on a business credit card makes the debt their own.
