Bankruptcy is a Trade
Bankruptcy is a trade. When a debtor files a bankruptcy he trades all of his unencumbered non-exempt property or its value for a discharge of debt. "Unencumbered property" means any asset that is not encumbered by a lien. "Non-exempt property" is any asset that a creditor with a judgment can take. So, the debtor in bankruptcy gives up everything that he would have lost anyway if all his creditors sued him and gets a discharge of debt in return.
The bankruptcy trustee divides up all of that property among the creditors according to bankruptcy law.
Exempt property is property that is exempt from seizure by a creditor or a bankruptcy trustee. The debtor keeps all of his exempt property and still gets a discharge of debt. So what is exempt and what is non-exempt is very important because that determines what the debtor will keep and what he will lose.
For individuals, the most valuable asset is normally the family home. Being able to keep home through a bankruptcy is often the primary concern for individual debtors. Most states have laws that say, "You can keep $xx of your house, but if its unencumbered value is more than that we will sell it."
However, there are two states that say "You can keep your house no matter how much it is worth." Those two states are Texas and Florida. Sometimes people who wish to protect the value that they have in their homes will consider moving to Texas or Florida and buying a home there. Doing that safely and legally requires legal advice.
The financial prosperity that one finds in Texas and Florida is due largely to the unlimited homestead exemption because it means that people can invest in start-up businesses without risking their home (and possibly their family) if their business fails.
Reorganization type bankruptcies like Chapter 11 and 13 are built around the same "trade" concept, except in reorganization type bankruptcies, the debtor can pay for non-exempt property rather than lose it. So, a business owner can use a bankruptcy to keep his business going.
This overview is very broad and there are exceptions and fine points of law that are not included here and each case is different. No one should make a legal decision based only on this article. Obtain competent legal advice before you act.
Sometimes people want to file a bankruptcy and not tell that they have some non-exempt property like too much cash or land so they won't lose it. Doing that is not legal and our office does not handle bankruptcies of that nature. Given enought time, however, some assets can be protected, but when the bankruptcy is filed all assets must be disclosed and all bankruptcy questions answered properly.