Keeping Property in Chapter 13 Bankruptcy

You can keep your property in Chapter 13 bankruptcy, but you'll have to keep up with secured debt payments and catch up on secured debt arrears.

In Chapter 13 bankruptcy, you can keep all of your property. But that doesn’t mean that you won’t have to pay for some of it. You’re allowed to protect, or “exempt,” a certain amount of equity in the property you’ll need to maintain a home and job. If you want to keep nonexempt property, such as a boat, baseball card collection, or another luxury item, you’ll have to pay for it through your Chapter 13 plan.

Also, if you want to keep a home, car, or some other property that you’re still paying on, and you put up the property as collateral (agreed that the creditor could take it back if you failed to make your payment), you must continue to make the payments and be able to pay back any arrearages over time.

Read on to learn more about how to keep your property in Chapter 13 bankruptcy.

Why Keeping Property in Chapter 13 Might Cost You

No one will sell any of your property in Chapter 13 bankruptcy. But that doesn’t mean that you get something for nothing. Here are the rules.

If all of your property is exempt, you’ll get to keep it without penalty. However, if it’s nonexempt, you’ll have to pay for it. So how do you know whether you have exempt or nonexempt property?

Your state decides the property that you’ll need for a fresh start in bankruptcy (some states allow you to choose between state exemptions and federal exemptions). You’ll get to keep exempt property without cost, no matter which bankruptcy type you file.

However, what happens to your nonexempt property—the property not covered by an exemption—will depend on the bankruptcy chapter.

  • Chapter 7 bankruptcy. The Chapter 7 trustee liquidates (sells) your nonexempt property and uses the proceeds to pay your unsecured debts.
  • Chapter 13 bankruptcy. The Chapter 13 bankruptcy trustee doesn’t sell your nonexempt property. Instead, you’ll pay for the value of any nonexempt property to your unsecured creditors through your repayment plan.

(Learn more in Bankruptcy Exemptions.)

Nonexempt Property Can Increase Your Chapter 13 Plan Payment

In your Chapter 13 plan, you’re required to pay off certain debts in full. These include mortgage arrears and priority debts such as certain taxes. However, the amount you pay your general unsecured creditors (such as credit card companies) depends on your income, expenses, and nonexempt property. Specifically, you’re required to pay all of your disposable income—the amount that remains after deducting allowed living expenses.

However, there’s more. If you have nonexempt assets, you’re required to pay either your disposable income or an amount equal to the value of your nonexempt assets—whichever amount is higher. So, while you get to keep your nonexempt assets, potentially you might have to pay a higher dividend to unsecured creditors through your repayment plan.

In fact, having a lot of nonexempt assets might preclude you from filing for Chapter 13 bankruptcy if your income isn’t sufficient to meet the required payment. (To learn more, see The Chapter 13 Repayment Plan.)

You Must Stay Current on Loan Payments to Keep a Home, Car, or Other Collateral

If you wish to keep property that you’ve pledged as collateral for a loan—such as your house or car—you must continue making the payments during your Chapter 13. Otherwise, your mortgage or vehicle lender can ask the court to lift the automatic stay—the order that stops your creditors from collecting against you—and if successful, initiate or resume foreclosure or repossession.

Whether or not you can pay your monthly mortgage or car payment outside of your plan will depend on your court. For instance, some require you to pay through the plan if you’re behind on payments when you file. Why does it matter? Because you must pay the bankruptcy trustee a percentage of all amounts paid through the plan, thereby potentially increasing your costs significantly.

You Can Catch Up on Loan Payments in Your Repayment Plan

One of the benefits of Chapter 13 bankruptcy that isn’t available in a Chapter 7 case is that you can catch up on secured debt payments. Chapter 13 bankruptcy lets you avoid foreclosure or repossession by allowing you to spread out missed payments over the course of your three- to five-year repayment plan. While you cure your default, the automatic stay prohibits creditors from foreclosing on or repossessing your property. When you finish your plan, you’ll be caught up on your payments.

(To learn more, see Secured Debts in Chapter 13 Bankruptcy.)

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