Chapter 13 exemptions - What nobody would ever tell you

Chapter 13 bankruptcy exemptions are like an ‘emergency window’ which gives you the last chance to legally save as much as you can when paying back unsecured creditors.

Chapter 13 bankruptcy and 7 exemptions are same - Really?

There is a big difference between Chapter 7 and Chapter 13 bankruptcy exemptions.

In Chapter 7 bankruptcy, exemptions help you decide which properties you can keep and which properties you need to handover to the bankruptcy trustee.

In Chapter 13 bankruptcy, exemptions help you decide how much you need to pay to your unsecured creditors through your reorganization plan.

Unfortunately, most people are completely unaware of this basic difference and hence end up making costly mistakes, especially when they file Chapter 13 bankruptcy without an attorney. They get shocks and aftershocks at various stages of bankruptcy, which only delays the process.

If you want to file Chapter 13 bankruptcy, then get an insider knowledge on the exemptions first. Perhaps, this’ll help you achieve your goal - ‘re-organize your messy finances’.

Before we dig deeper, let us know little bit about the most common types of exempt properties:

  1. Unemployment benefits
  2. Jewelry
  3. Necessary personal belongings
  4. Household items
  5. Home
  6. Pensions
  7. A percentage of unpaid earned wage

Read more: Bankruptcy Exemptions: Legal recourse to save your assets

Why bother about exemptions?

In Chapter 13 bankruptcy, you get the chance to pay off all your debts (secured and unsecured) through a court-approved repayment plan and keep your properties. You pay a particular amount to the court every month and the bankruptcy trustee distributes it amongst your creditors. This process continues till all your creditors are paid off, which normally takes 3-5 years.

Two things are extremely important here. The first one is the repayment plan (which the court approves) and the second one is the monthly payment amount. Now, the monthly payment amount is important since it makes a direct impact on your savings. And, this is where exemption plays its role.

Chapter 13 exemptions determine the amount you will pay to your unsecured creditors. As per the general rule, you need to pay an amount that is equivalent to the value of the assets you’d have lost in straight bankruptcy. The type of assets you’d have to give up in Chapter 7 bankruptcy will depend upon bankruptcy exemptions. Usually, you can’t keep properties, which fall under the category of ‘non-exempt’ in Chapter 7.

Read more: Chapter 13 bankruptcy - Pay off your debts in a timely manner

Why was this rule introduced?

This rule was introduced because lawmakers didn’t want creditors to suffer when debtors file Chapter 13 bankruptcy. In Chapter 7 bankruptcy, unsecured debts are paid off by liquidating nonexempt assets. So, as per the bankruptcy law, these creditors should at least get the same amount when debtors file Chapter 13 bankruptcy.

How is the exemption amount calculated?

Exempt properties and exemption amount depend upon the state where you live. If you’ve been a resident of California since the last 2 years, then this state’s exemption laws will be applicable for you. But if you’ve moved into this state recently, then you need to find out which state’s exemption laws will be applicable in this case.

How much can you protect through Chapter 13 exemptions?

This is a tough calculation.

  1. List your assets and then calculate the total value first.
  2. Check out the state and federal bankruptcy exemptions. In some states, you’ll be allowed to take advantage of both the exemptions. In other states, you’ll be permitted to use either state’s bankruptcy exemptions or federal bankruptcy exemptions. You need to choose any one option.
  3. Start calculating. Let us assume that your state gives you the option to exempt $3000 for your musical instruments. You have a violin worth $1000, then the total amount of the violin is exempt. If there is no available exemption for musical instruments in your state, then it’s a problem. You’ll have to pay back your unsecured creditors minimum $1000. In addition to this, you’ll also have to pay the value of other non-exempt properties through the new repayment plan.

Influence of exemptions on repayment plan - Too scary?

You need to be current on your secured debts in Chapter 13 bankruptcy. Plus, you’ve to pay the full amount on past due tax, mortgage arrears, child support, etc. As far as the unsecured debts are concerned, you need to pay as per your income. But as it has been said earlier, the payable amount would be equal to what creditors would have received through liquidation of assets in Chapter 7 bankruptcy. This implies you need to pay the value of non-exempt assets to creditors.

If you don’t have the financial means to pay the minimum amount to the unsecured creditors, then it won’t be possible to propose a monthly payment plan.

Real life scenario

You can pay $500 per month to complete the repayment plan in 5 years.
Your priority debts would eat up $300 of the amount.
This means you can only pay $200 on your unsecured debts.
However, if the total value of your non-exempt assets is $24,000, then you need to pay this amount by any means.
This implies you need to pay $400 per month for 5 years (60 months) on your unsecured debts irrespective of what your income is.

Federal nonbankruptcy exemptions - Another trump card for you

Do you want to save more? If so, then you might be interested to know about federal nonbankruptcy exemptions, which help you to protect your assets. These exemptions are quite similar to normal bankruptcy exemptions. The only difference is you can take advantage of nonbankruptcy exemptions only when you’re using state’s exemptions. Remember, you won’t be allowed to combine nonbankruptcy exemptions and federal bankruptcy exemptions.

You can save your social security disability insurance from bankruptcy under the new bill, Return to Work Act of 2019. It can help a person to return to work, if they can, while preserving the program's long-term sustainability for the permanently disabled.

The bottom line

Chapter 13 bankruptcy exemptions can affect your payments and savings dramatically. They can help you determine if at all you can afford the repayment plan. So, be careful. A single misstep can jeopardize your total plan.

Don’t miss out - Creditor's right: Do's and dont’s in chapter 13 bankruptcy

  • expertise badge
  • TrustLink logoTrustLink logo
  • Customer ratings on BBB
  • IAPDA logo
  • Calchamber Member
  • Calbar Registered
  • D&B
  • Trustpilot
  • yelp logo