In Chapter 13 bankruptcy, exemptions determine, in part, how much you will have to pay to your nonpriority, unsecured creditors through your Chapter 13 repayment plan. This is different from how exemptions come into play in Chapter 7 bankruptcy – where exemptions determine what property you get to keep and what property you may have to give up.
There is often confusion and misunderstanding as to what part exemptions play in Chapter 13 bankruptcy. Here’s a primer on exemptions, and how they work in Chapter 13 bankruptcy.
Why Exemptions Matter in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, you agree to repay all or a portion of your debts over time. In return, you get to keep your property. Through the bankruptcy, you propose (and the court must approve) a repayment plan. Most plans last from between three and five years. During the repayment period, you make a monthly payment in a set amount that is distributed to your creditors.
The key for many folks considering Chapter 13 bankruptcy is: how much will the monthly payments be? This is where exemptions come into play. Here’s the general rule: You must pay your unsecured creditors the value of the property you would lose if you had filed for Chapter 7 bankruptcy. What property you keep or lose in Chapter 7 bankruptcy is determined by bankruptcy exemptions. For the most part, you keep exempt property, and must surrender nonexempt property to the trustee who uses it to pay your unsecured creditors.
Which Bankruptcy Exemptions Apply?
Which types of property are exempt and exemption amounts vary by state. Determining which state bankruptcy exemptions apply to your case is the same for Chapter 13 and Chapter 7. For the most part, it depends on which state you have resided in for the past two years. If you haven’t moved recently, then you can use the exemptions in your home state. If you have moved within the past two years, you can get details on which state exemptions to use in Bankruptcy Exemptions: Which State Exemption System Can You Use? (There are also special rules for the homestead exemption.)
Each state and the District of Columbia has its own set of exemptions. California has two sets of exemptions that you can choose from. Some states allow you to choose between the state exemptions and another set of exemptions set out by federal law, called the federal bankruptcy exemptions. To learn more about exemptions and for a list of you state’s exemptions, see Bankruptcy Exemptions -- What Do I Keep When I File for Bankruptcy?
Exemptions and the Chapter 13 Bankruptcy Repayment Plan
In your Chapter 13 repayment plan, you must keep current on debts secured by property that you wish to keep – these include your mortgage and car loan. You must pay some of your debts in full – these usually include back taxes, back child support owed to a child or ex-spouse, and mortgage arrears or other arrearages on secured debts (debts that are secured by a piece of property, like a car).
As for the rest of your debts (usually your unsecured debts, which include credit card debts, medical debts, and other debts that aren’t secured by a piece of property), you must pay as much of them as you can given your available income. However, the total amount you pay through your plan must be at least the amount that your unsecured creditors would have received had you filed for Chapter 7 bankruptcy – which essentially means the value of your nonexempt property (less the trustee's commission and costs and fees that would be incurred by the trustee in selling the property).
Figuring Out How Much of Your Property is Exempt
Make a list of your property and its value, then go through your state’s exemptions (and the federal ones too, if your state allows you to use them) and see what amount is exempt. If you own a piano worth $2,500 and your state allows you to exempt up to $5,000 in musical instruments, then the full amount of the piano is exempt. If your state doesn’t provide an exemption for musical instruments, then you will have to pay your unsecured creditors at least $2,500 (plus the value of all your other nonexempt property) through your plan.
Determining which of your property is exempt, and coming up with a viable Chapter 13 repayment plan can be complicated. To get help, consult with a good self-help book, such as Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo), or talk to a local bankruptcy attorney.