Should You Protect Assets Or Income In Bankruptcy?

Claiming bankruptcy is all about protecting your finances. But bankruptcy cannot solve all financial problems, nor can it protect all your resources. Each debtor has to choose what they will prioritize and how they will do so. One of the biggest decisions is whether you will prioritize protecting your income or your assets. Here's what you need to know about both routes. 

How to Protect Income

Choosing Chapter 7 bankruptcy is one of the easiest ways to protect your income. If you qualify to use it, this is a one-time liquidation of qualifying assets to pay debts. Eligible debts that are not fully paid are discharged, and the case is closed. 

Notably, there is little discussion of your income in this scenario. That's because your bankruptcy estate is only what you possess (or have the legal right to) on the filing date, and liquidation occurs just once. What you earn after that is your own to keep. Income does come into play in that high-earning debtors may not be allowed to use Chapter 7 in order to prevent abuse of the system. 

How to Protect Assets

If you want to keep your house, vehicles, a second home, or your bank account balance, you can still get bankruptcy protection. There are two primary ways to do this.

The first is to use bankruptcy exemptions. These are state and federal lists of dollar values and specific types of assets which can qualify for an exemption to Chapter 7 liquidation. Some, like retirement accounts, are easy to exempt. Others, though, are limited to assets in which you have a relatively small amount of equity. 

A second method to protect assets is to use Chapter 13 bankruptcy. This is known as wage earner's, or repayment plan, bankruptcy. Instead of liquidation, you agree to a payment plan for qualifying debts over a three- or five-year time frame. Many debtors can also reaffirm secured loans on things like cars and real estate — as long as they can afford to. Upon payment plan completion, some remaining debts are discharged. 

How to Choose a Priority

Clearly, there are viable paths for debtors to protect what means the most to them and what will help them move forward financially. Which should you choose to prioritize during bankruptcy? The answer is unique to each person's situation. Start by learning more about the options available to you. Meet with a bankruptcy attorney in your state today to learn more.