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Tools of trade are possessions considered exempt under bankruptcy law because a person uses them to make a living. Creditors cannot demand that these possessions be seized and liquidated to satisfy debts. In some nations, the total value of tools of trade that may be retained through bankruptcy may be capped, in the interest of preventing false claims that personal property is actually a tool of trade. A bankruptcy court determines what qualifies for this protection and what does not.
In bankruptcy filings, debtors indicate that they do not have the assets or ability to repay debts and wish to have them forgiven. The bankruptcy court mandates that the debtor liquidate, selling off assets to repay as much of the debt as possible, before erasing the debt. Debtors are allowed to retain certain personal property under the law, as well as any tools of trade.
This includes actual tools, not assets. Thus, a jeweler is allowed to keep jeweling instruments, welding torches, polishing tools, and so forth, but cannot keep gems and precious metals, as these are assets. Computer programmers could retain their computer equipment, along with things like cell phones they might use to communicate with clients. Anything that a person uses to make a living is protected under the law.
The goal of protecting tools of trade is to make it possible for people to earn a living after bankruptcy. Taking all property, including property used to generate income, would create an unfair situation; the bankrupt person couldn't access credit to replace tools because of the bankruptcy. In cases where the definition of “tools of trade” is nebulous, the court must determine the most fair ruling in the situation, protecting the financial concerns of creditors without stripping the debtor of necessary belongings.
Generally, if a debtor can clearly demonstrate that something is used professionally, it is protected as a tool of trade. Contractors, for example, need their trucks to visit work sites, along with the equipment they carry to perform work, and musicians need their instruments. Other possessions fall under personal property. Debtors who are concerned about the ability to protect important assets can meet with an attorney to discuss options, although it is important to be aware that protections like registering real estate as a homestead are only available to people who are not in active default on loans, to prevent situations where debtors attempt to protect assets retroactively.
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