Most of the time I get called for advice on Bankruptcy, the conversation begins with the same statement from the potential client, “I want to do a Chapter 7.” I think of this, from a lawyer’s perspective, as if I were going to walk into the gas station and ask the clerk, “Can I have a lotto ticket please, but I would like one that has tonight’s winning numbers… Please.”

That’s an obvious statement, considering that Chapter 7 of the Bankruptcy Code deals with liquidation. Under Chapter 7, all your unsecured debt, like credit cards, medical bills, and personal loans are discharged or forgiven. However, it isn’t as easy as it seems. Liquidation is not always the right choice for many individuals or families.

If you own a car, or a luxury item such as a boat or other water craft, or if you have an investment property, even one that doesn’t generate any income, you could be putting those at risk, or potentially have to pay money to keep them.

Here is how it works:

When you file for Bankruptcy, what you are telling the Court is that your current income isn’t enough for you to pay all your monthly debts. Your current income is usually calculated by taking an average of the last six months. Of course, if you have been unemployed, or your income has been substantially lower over the past six months than it is now, or it will be due to additional wages coming from a raise or new job, that must be taking into consideration as well. However, it isn’t only about income.

The other thing you are telling the Court, specifically in a Chapter 7, is that if you were to sell or “liquidate” everything you own, all your assets including cars, personal items such as clothing, jewelry, collectibles, guns, etc., what you would receive from the sale of those items, is not enough to pay your debts.

The problem arrises when the value you attribute to some of those assets, is not exactly correct.

Most states, Florida included, have constitutional protections as to what assets are “exempt” from your creditors. Exempt really means protected, as assets that are exempt cannot be taken away from you by creditors. Florida specifically, has a Homestead exemption that under most circumstances protects your home from being taken from you by all creditors except the lender or lenders that hold mortgages against the property, or other creditors that have liens by statute such as homeowners and condominium associations. But a credit card can’t take your home away if you stop paying the credit card.

The issue with exemptions is that they were written years ago, and protect very little. Florida, for example, exempts one $1,000 worth of value in a car per person. So if you have a car that is worth $12,000, and you owe $14,000 on it currently, you’re safe, as you have no real value in that car, since you owe more than it is worth. However, if that same $12,000 car, is almost paid in full, or you owe $8,000 on it, the remains $4,000 is your value in that car, and only $1,000 of it is protected from creditors under Florida law.

If you were to file a Chapter 7, under that scenario where $3,000 in your car is not protected, the Trustee appointed by the Court could force you to surrender that car, or give you the option to pay that value towards your debt as part of a compromise.

What your car is worth, is another uncertainty. Many trustees go by very high estimates of valuation such as the NADA Clean Retail estimate of your car’s value.

This is just one example of how filing a Chapter 7, simply because it is the Holy Grail of bankruptcies, is sometimes not the right choice.