Assets

• Bankruptcy can be dangerous; the court creates what is known as a bankruptcy estate, which is an estate that manages the debtor's assets. This estate examines the debts and may sell off key assets to generate enough cash to pay off the most important debts, especially the debts that are backed by assets in the first place, known as secured loans. Debtors give the court detailed information on their assets, income and expenses to help the bankruptcy estate make these decisions.
  
  

Exemptions

• All states have laws in place that protect borrowers from losing their most important or most necessary assets, but these laws can vary from state to state. Homes are one of the most frequently protected assets, but there are limits. Most states have an exemption limit, and if the borrower's home equity goes over this exemption limit, he may lose the home to pay for important debts. Some states do not have home exemptions at all, which means borrowers' homes are not safe during bankruptcies.
  
  

Chapter 13 vs. Chapter 7

• The two common types of individual bankruptcy are Chapter 13 and Chapter 7. In a Chapter 13 bankruptcy, creditors are partially paid back through a payment plan that the bankruptcy estate creates, which the debtor must follow for up to five years. In this case, creditors receive at least some profit, and homes are often protected automatically. Chapter 7 requires no payment plan, but exemption limits apply, and there is a chance borrowers will lose their homes.
  
  

Foreclosures

• A bankruptcy creates an automatic stay of a foreclosure, which is the legal process a lender uses to seize a house and use it as payment for a defaulted mortgage. Many debtors file for bankruptcy to stop foreclosures and keep their houses. This works, but only up to a certain point. The lender can appeal to remove the stay and proceed with the foreclosure, and the lien against the home may remain after the bankruptcy is completed.