Dear Bankruptcy Adviser,

Dear Maria,

It appears from your question that you didn’t hire an attorney to help you with your filing. Take a deep breath, because the article that follows, while it might be helpful to other people, will not be good news for you.

As I understand your question, you filed Chapter 13 to protect your stock portfolio, and now you’re hoping that if you sell your stocks and use that money to pay down your car loan that you can convert to Chapter 7. You might have been able to do that before — but not now. When you filed Chapter 13, your assets became a matter of public record. If you try to convert, the trustee will be able to figure out pretty easily where that money has gone, and your car may become vulnerable to seizure by the court. The Chapter 7 trustee would likely review the assets listed in your Chapter 13 petition and may be able to prove that you transferred the asset while the Chapter 13 was still open.

However, your instincts are correct. Cash and car equity are protected differently under the law, and each state has different rules governing the amount and type of asset that can be protected. In a Chapter 13 bankruptcy plan, the general rule is that you must pay back at least an amount equal to the assets you wish to protect. Here are three examples when filing a Chapter 7 case:

California: You can protect $2,900 of car equity and cash and other assets up to a total of $19,675 (the wild-card exemption). In California, you’d be able to file Chapter 7 and protect everything. Florida: $1,000 in car equity is protected and $1,000 in personal property, including the money in the stock market. That’s it. Whether the remaining $12,000 is in cash or car equity won’t matter — the trustee will have the right to liquidate the stock market money and distribute it to your creditors. Nevada: You can’t protect the cash, but you can protect $15,000 in vehicle equity. So if you had talked to an attorney and live in Nevada, your plan might have worked.

While we’re on the subject, it’s important to note that if you file bankruptcy, you can place the money into an IRA and the bankruptcy code allows you to protect up to $1 million. Of course, the catch is that you can only put in $3,000 per year. Thanks, U.S. government! Still, it’s good to know that you can protect a sizeable chunk of your retirement if you’re smart about using your IRA instead of savings. Thus, if your $13,000 was in your IRA, Maria, it would be safe in any state. One exception to the $3,000 per year contribution is when you roll over money from an employer-sponsored retirement account into an IRA. In that case, when you leave your job you could transfer that investment into an IRA and protect up to $1 million.

Justin Harelik is a practicing bankruptcy lawyer in the Los Angeles office of Price Law Group. To ask a question of the Bankruptcy Adviser go to the Ask the Experts page. and select bankruptcy as the topic.

— Posted: Nov. 29, 2005