Will Chapter 13 Debt Reorganization Allow Me to Keep My Property?

If you file for Chapter 13 bankruptcy, you can keep all of your property -- but you will have to enter into a three- to five-year repayment plan to pay off some or all of your debts.

When you file for Chapter 13 bankruptcy, you don't have to give up any of your property. Instead, you use your income to pay off all or some of your debts through a repayment plan that lasts from three to five years. In contrast, you don't have to make any payments if you file for Chapter 7, and you will get your discharge four to six months after you file your paperwork. However, if you have any property that isn't protected by an exemption, the Chapter 7 trustee can take it, sell it, and distribute the proceeds to your creditors.

You May Lose Property in Chapter 7

In Chapter 7 bankruptcy, you may keep all property that's exempt under your state law (or federal law, if your state allows you to choose between the state and federal exemptions). Most states exempt at least some home equity, some equity in a vehicle, clothing, personal items, furnishings, tools of the trade, and other necessities. (State exemption laws vary greatly; to see your state's list -- and learn more about how exemptions work -- see Bankruptcy Exemptions - What Do I Keep When I File for Bankruptcy?)

If you have any valuable property that isn't exempt, the trustee can take it and sell it, so the proceeds can be used to pay off your creditors. For example, if you have a grand piano, vacation home, or valuable art collection, the trustee is likely to take it for the benefit of your creditors.

Your Property in Chapter 13

You don't have to give up any property in Chapter 13. Instead, you pay back creditors directly, through monthly payments to the trustee. Some debts have to be paid in full in Chapter 13; other debts may be repaid only in part or not at all, depending on your income and other factors.

If you have valuable nonexempt property, you can keep it in Chapter 13. However, it may have a significant effect on your repayment plan. Chapter 13 creditors are entitled to receive at least as much as they would have received if you had filed under Chapter 7. In other words, you must pay at least the value of your nonexempt property into the plan. If your nonexempt property is worth a lot (for example, you own a vacation home free and clear), it could increase your plan payments significantly.

Filing for Chapter 13 doesn't affect your obligations under secured loans, such as a mortgage or car note. If you want to keep the property, you have to stay current on your payments, just as you did before filing for bankruptcy. However, Chapter 13 can help you catch up if you've fallen behind on a secured loan. For example, if you've missed a couple of car payments and are facing the possibility of repossession, you can roll those missed payments into your Chapter 13 plan and pay them off a little each month. As long as you also stay current on your payments going forward, the creditor won't be able to take the car. Being able to spread your arrearages over the repayment period is a significant advantage of Chapter 13.

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