What Are Bankruptcy Exemptions
Bankruptcy exemptions allow individuals to keep their assets safe in bankruptcy. If an asset is exempt, a trustee cannot take the asset and sell it to pay an individual’s creditors. Exemptions protect all different types of property such as cars, money, bank accounts, real estate, furniture, tools, etc.
Many individuals are under a misguided impression that when they file bankruptcy all their property is taken away. This, however, is not true. The Bankruptcy Court understands that individuals need to keep some of their property to meet a basic standard of living.
Chapter 13 vs Chapter 7 Bankruptcy Exemptions
Individuals who are looking to file bankruptcy must first understand that bankruptcy exemptions play different roles in Chapter 13 and Chapter 7. Debtors who file Chapter 13 bankruptcy will need to use exemptions to keep their property. However, bankruptcy exemptions in Chapter 13 are different than Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, any nonexempt property becomes property of the bankruptcy estate. This means a Trustee can take any property in a Chapter 7 bankruptcy that is not exempt and sell it to pay off an individual’s creditors. In Chapter 13 bankruptcy, the process is different. Debtors who file a Chapter 13 bankruptcy either have higher wages or property with assets. These individuals will enter a repayment plan to pay off their debts. Chapter 13 bankruptcy allows individuals to pay back their creditors, so they will not need to worry about losing property that doesn’t fall under an exemption. Exemptions in Chapter 13 play a vital role in determining how much an individual will have to pay back in their Chapter 13 repayment plan. The Chapter 13 repayment plan is calculated based on the equity in a debtor’s nonexempt property.
State vs. Federal Exemptions
When Congress enacted the Bankruptcy Code, they set out their own set of exemptions that States could use. Congress gave the State’s the choice to opt-out of the Federal exemptions if their State’s exemptions were more favorable. The type and amount of property that an individual can file depends upon the state laws where the individual lives.
To use a State exemption the individual must have continuously domiciled in that state for at least 730 days before filing their bankruptcy petition. Individuals who have not lived in any state for 730 days before filing bankruptcy, will choose the State’s exemption they lived in for the previous 180 days before filing.
Federal non-bankruptcy Exemptions
In addition to the Federal and State exemptions, there is also property that does not fall under any exemption which allows individuals to keep this property safe from creditors. These exemptions are not in the Bankruptcy Code. Some examples of these exemptions include social security benefits, death and disability benefits, and survivors’ benefits.
How Do Exemptions Work in Chapter 13?
When individuals file Chapter 13 bankruptcy, they must provide a feasible repayment plan that will be paid over 3-5 years. Generally, individuals propose a plan to repay some or all their debts back. Chapter 13 rules are very complicated. Individuals will need to look at their debts, income, assets, and expenses to calculate a plan. The Court will look at the debtor’s disposable income and equity in their non-exempt property to determine how much an individual should pay back to their creditors. Disposable income is calculated by subtracting an individual’s expenses from their monthly income. The Bankruptcy Court requires that any money they have left over after living expenses should be allocated to funding the debtor’s Chapter 13 repayment plan.
To determine an individual’s plan, they will need to determine which property they can exempt and how much equity their property has that is not exempt. Individuals are required to pay back the greater of their disposable income, or the value of their assets that are not exempt. This will also show the Court that the individual is complying with the “Best Interest Rule” in a Chapter 13 bankruptcy. The Best Interest Rule in a Chapter 13 bankruptcy requires that a debtor show they are making their “best-effort” to pay their creditors back. Thus, as mentioned above, individuals must show that they are using their disposable income to pay back their creditors.
To calculate the value of an individual’s non-exempt asset, the individual must subtract the value of the asset from the allowable exemption. Anything that is non-exempt or partially exempt must be paid back in the plan. For example, if a debtor owns a home that is worth $900,000 and the homestead exemption in the state is $100,000, the debtor will have to pay back any equity over the exemption ($800,000). So, if the debtor has $100,000 in credit card debt, the individual will have to pay back the full $100,000 over 3-5 years.
As a rule, creditors receive the same or more in a Chapter 13 bankruptcy as they would in a Chapter 7 bankruptcy. This is called the “Best Interest of Creditors Test.” Thus, if an individual’s property could be sold in a Chapter 7 bankruptcy by the Trustee, the creditors in a Chapter 13 bankruptcy should be paid back the same amount.
For example, let us say a debtor is thinking about filing bankruptcy but does not know which chapter to file. Let us say they are thinking about filing a Chapter 7 bankruptcy. The debtor owns a vehicle worth $10,000. If the debtor files a Chapter 7 bankruptcy the vehicle in the state, she lives in is not exempt. Thus, the trustee would take the vehicle and use it to pay the individual’s creditors. If the same individual files a Chapter 13 bankruptcy, the individual could keep the car if she pays back the $10,000 in the repayment plan.
How Nonexempt Property Can Increase a Chapter 13 Plan
Individuals with little non-exempt assets are often in a better position at getting their Chapter 13 plan confirmed by the Bankruptcy Court. Individuals with a significant amount of non-exempt property can find it harder to fund a plan especially when they do not have much disposable income after their living expenses each month. Individuals with non-exempt property and little assets are at a disadvantage because it can be harder for them to pay off their plan in 3-5 years as required by the bankruptcy rules.
Seeking Legal Help
Creating a bankruptcy repayment plan can be quite confusing. The laws are complex, and many individuals should consider hiring a lawyer to help them. Many lawyers have computer programs to help calculate a feasible repayment plan. When calculating monthly disposable income, many individuals are unaware that their living expenses must be deemed reasonable. Individuals who list unreasonable expenses will most likely not have their plan confirmed.
Moreover, coming up with a feasible plan that is fair is vital. Creditors can object to a plan if they believe it is not fair. An attorney can help ensure that an individual’s Chapter 13 plan is fair, reasonable, and has the best interest of the creditors. Many bankruptcy lawyers provide free consultations that individuals should take advantage of. Individuals that enter a repayment plan are stuck in the plan for five years. Thus, ensuring the individual can afford the proposed plan is vital to making sure the individual gets a discharge and can keep their property.
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