When you file for bankruptcy, you don’t lose everything. Your state’s exemption laws outline the property you can protect. Although you lose nonexempt property in Chapter 7, you can keep it in Chapter 13, but there’s a catch—you must pay the value of nonexempt property over the course of your three- to five-year repayment plan.
In this article, you’ll find out more about how exemptions protect property and influence the amount of your repayment plan in Chapter 13 bankruptcy.
(You can learn about the bankruptcy chapters in Which Type of Bankruptcy is Right for Me?)
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 to the bankruptcy trustee appointed to your case. In turn, the trustee distributes the payment to your creditors.
Of course, most people want to know how much their payment will be each month. Keep in mind that creating a repayment plan that conforms to all rules is complex, so much so that bankruptcy attorneys use software programs to create them.
That said, generally speaking, here’s how exemptions come into play.
First, it’s important to understand that creditors must receive the same or more in a Chapter 13 case as they would in a Chapter 7 case. Therefore, if the Chapter 7 trustee would have been able to sell property for the benefit of creditors in a Chapter 7 case, then the creditors should at least get that same amount in a Chapter 13 case.
So how do you figure out the amount creditors should receive? It’s pretty easy actually. It’s the value of the debtor’s nonexempt property. A Chapter 13 debtor must pay to keep the property that would otherwise have been lost had the debtor filed for Chapter 7 bankruptcy.
Example. Mia wants to file for bankruptcy, but she isn’t sure what will happen to her property. After speaking to a bankruptcy lawyer, she learns that she can protect everything she owns with bankruptcy exemptions other than a guitar valued at $10,000 that her grandfather gave her. The attorney explained that in Chapter 7 bankruptcy, the trustee would sell the guitar and distribute the money to creditors. By contrast, she could keep it in Chapter 13 bankruptcy, but, because it wasn’t covered by an exemption, she’d have to pay for the guitar to the tune of $278 per month for 36 months (plus trustee fees) or $167.00 per month for 60 months (plus trustee fees).
The type and amount of property you can exempt varies by state. Most states will require you to use state exemptions. Some states, however, allow you to choose between the state exemptions and the federal bankruptcy exemptions.
How long you’ve lived in the state matters, however. If you haven’t moved recently, then you can use the exemptions in your home state. If you’ve moved within the past two years, you’ll want to read Bankruptcy Exemptions: Which State Exemption System Can You Use?
You’ll likely want to start by listing all of your property and what its’ worth. Next, you’ll go through your state’s exemptions (or the federal exemptions, if you’re able to use them and it makes better sense). Finally, you’ll determine what’s exempt, as well as the value of any nonexempt property.
For instance, if you own a piano worth $2,500 and your state allows you to exempt up to $5,000 in musical instruments, then you’ll be able to protect the piano’s entire value. If your state doesn’t provide an exemption for musical instruments, then you’d have to pay your unsecured creditors at least $2,500 (plus the value of all your other nonexempt property) through your plan.
Determining the exempt status of property 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 Attorney Cara O’Neill, or talk to a local bankruptcy lawyer.