Exemptions in Chapter 13 Bankruptcy

Chapter 13 bankruptcy filers can keep everything they own, but this benefit can come at a hefty cost. In this article, you'll learn how bankruptcy exemptions work in Chapter 13, including these basics:

• You can use bankruptcy exemptions to protect needed property, such as household goods, some equity in a house and car, and a qualified retirement account.
• You must pay creditors to keep "nonexempt" property that isn't protected by a bankruptcy exemption.

You'll also learn why paying for nonexempt property in Chapter 13 helps ensure creditors receive equal treatment under Chapters 7 and 13.

How Do Bankruptcy Exemptions Help People Keep Property in Chapter 13?

No one loses everything when filing for bankruptcy. Each state has a list of the property a bankruptcy filer can keep, with some states letting filers choose between the state's exemptions or federal bankruptcy exemptions.

When you prepare your bankruptcy paperwork, you'll disclose everything you own and indicate which items are protected by bankruptcy exemptions. The Chapter 13 bankruptcy trustee assigned to your case reviews your exemptions for accuracy.

What Property Will Exemptions Protect in Chapter 13 Bankruptcy?

Most people can keep all personal belongings and furniture because household items you use daily aren't typically worth much. However, you'll be limited regarding valuable things, like your home, car, jewelry, family heirlooms, collectibles, savings and investments, and other expensive assets.

Some people can protect everything they own using bankruptcy exemptions, while others will have a substantial amount of fully and partially nonexempt assets. In most cases, your nonexempt property will be nonessential luxury items most people don't need, like boats or vacation cabins.

Learn about protecting a house or car in Chapter 13 bankruptcy.

Where Do I Find Chapter 13 Bankruptcy Exemptions?

Your local Chapter 13 bankruptcy lawyer will likely do a cursory property review when first meeting with you to determine how much property you might need to pay for through your plan. Otherwise, review these state bankruptcy exemption lists or read more about keeping property in Chapter 13.

What Happens to Nonexempt Property in Chapter 13 Bankruptcy?

You have to pay for it. Here's why.

Bankruptcy filers can protect the same amount of property in both Chapters 7 and 13. Chapter 13 creditors are entitled to the value of your nonexempt property (those things not covered by an exemption) to offset losses.

How Do Creditors Get Paid for Nonexempt Property in Chapter 13?

In Chapter 13, you must pay the amount creditors would have received had you filed for Chapter 7. So even though the process for paying creditors in Chapters 7 and 13 differs, you'll want to understand what happens to assets you can't protect with an exemption in Chapter 7.

Chapter 7 bankruptcy is a "liquidation" chapter. If you can't exempt something in this chapter, the bankruptcy trustee will sell it, return the exemption amount to you, and pay creditors with the amount remaining after deducting the trustee's fee and sales costs.

Chapter 13 bankruptcy is a "repayment" chapter. The Chapter 13 trustee won't sell property, even if you ask. Instead, you must pay an amount equal to the nonexempt portion your creditors would have received in Chapter 7. This is a threshold amount, and you might have to pay more if your income is high or you have significant debts that must be paid in full.

We explain more about Chapter 13 payments in the "Calculating Your Chapter 13 Payment" section below.

How Do Bankruptcy Exemptions Affect My Chapter 13 Plan Payment?

In a Chapter 13 bankruptcy, you propose a plan to repay some or all of your debts through monthly payments that you'll make to a bankruptcy trustee. In general, the amount you'll pay will depend on your:

• income
• monthly living expenses
• nonexempt property, and
• debt.

You'll determine how much you can pay by subtracting allowed expenses from your income. You'll qualify for Chapter 13 if the amount you can afford will cover all the debt you're legally required to pay.

But that isn't the only criterion. Your creditors must also get at least as much as they would have if you'd filed for Chapter 7, which is why the value of your nonexempt property enters the equation. Learn more about your obligations in Chapter 13 bankruptcy.

Examples of How Bankruptcy Exemptions Affect a Chapter 13 Payment

Understanding and meeting all of the Chapter 13 plan requirements can be complex. These examples help illustrate how property can impact your payment.

Example 1. Emma is working in the tech industry in San Francisco. She makes too much money to qualify for Chapter 7 but struggles to pay a $24,000 credit card debt because of the high cost of living. The only property she owns is an old futon and an old car, which she can protect with bankruptcy exemptions.

After meeting with a bankruptcy attorney, she learns she'll pay her discretionary income of $275 per month in a 60-month repayment plan for a total of $16,500. Any remaining credit card balance will get wiped out when she completes the plan. She decides to explore other options because she won't save anything after paying the trustee and her attorney fees.

Example 2. Brayden makes minimum wage working as a coffee barista and struggles to pay his bills after a divorce. Because he was awarded spousal support in the divorce settlement, he doesn't qualify for a Chapter 7 discharge. He's also unable to protect $50,000 in home equity and a recreational vehicle worth $20,000 with bankruptcy exemptions, so, hoping to keep the house and RV, he's considering filing for Chapter 13 bankruptcy.

Brayden met with a bankruptcy attorney and learned his monthly discretionary income is $200. However, because he has $70,000 in nonexempt property, Brayden must pay a minimum of $1,167 monthly in a 60-month repayment plan. Brayden isn't a candidate for Chapter 13 bankruptcy because his barista wage isn't sufficient to support the required repayment plan payment.

Calculating Your Chapter 13 Plan Payment

The Chapter 13 repayment plan rules are relatively complicated. Still, you can get an idea about the minimum amount you'd need to pay. If you are filing because you don't qualify for Chapter 7, here's what you'll do (the requirements are more lenient otherwise).

1. Start by calculating debts you must pay in full in a Chapter 13 plan. These debts include mortgage and car payments and arrearages (if you plan to keep the house or car), recently incurred income tax debt, and unpaid spousal and child support.
2. You'll also need to determine the minimum you must pay toward "unsecured" debts. Unsecured debts aren't associated with a home, car, or other property you've pledged as collateral for a loan or property on which a creditor placed a lien. Add the value of your nonexempt property and deduct sales costs and the trustee's fee.

You must earn enough to pay all your required debts to qualify. You must also pay all of your disposable income to creditors, with unsecured creditors receiving at least as much as they'd receive in Chapter 7.

Consult With a Bankruptcy Lawyer

Drafting a Chapter 13 plan that the bankruptcy court will "confirm" or approve is a complicated task. This simplified explanation is provided to aid understanding only. Your bankruptcy lawyer can determine the specific amount you'd be required to pay in Chapter 13 bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.