Last time, we spoke about how exemptions work in Chapter 7 bankruptcy. As we noted, Chapter 7 exemptions refer to assets that are not subject to liquidation. In Chapter 13 bankruptcy, exemptions have a different function.
The overall purpose of Chapter 13 bankruptcy is to come up with a repayment plan in order to pay back creditors, and the function of property exemptions in Chapter 13 bankruptcy reflects this goal. Exemptions specifically impact the calculation of how much the debtor will be responsible for paying to the bankruptcy court during the Chapter 13 repayment plan. The more non-exempt property the debtor has, the larger will be the minimum amount he or she will be required to pay back.
The types of property that are exempt from the repayment plan, as in Chapter 7 bankruptcy, are defined under state and federal law. The same rules apply with respect to states having the ability to establish their own set of exemptions, and some states do allow certain federal exemptions as supplements to the state exemptions.
In addition to being used to determine a debtor’s repayment plan, there is another potential use for exemptions in Chapter 13 as well. Repayment plans in Chapter 13 bankruptcy usually run from three to five years. If the debtor is successful in completing the plan, he or she will be able to keep the debtor’s both exempt and non-exempt property. If the repayment plan is unsuccessful, though, non-exempt property can be sold to pay creditors, as is done in Chapter 7 bankruptcy.
The details about how exemptions work in bankruptcy, and which form of bankruptcy is best for a debtor, should be sought from an experienced bankruptcy attorney.
Findlaw, “Exempt Property in a Chapter 13 Bankruptcy,” Accessed Dec. 17, 2015.
American Bar Association, “General Comparison of Chapter 7 and Chapter 13 Bankruptcy,” Accessed Dec. 17, 2015.