Exempt Property in a Chapter 13 Bankruptcy
A Chapter 13 bankruptcy involves the reorganization of a debtor's assets and the creation of a repayment plan to pay back creditors for debts. This is different from a chapter 7 bankruptcy (liquidation), which requires that property which does not fall under one of various types of bankruptcy exemptions be turned over to the bankruptcy estate. In a Chapter 7 bankruptcy, this means that non-exempt property can end up being sold in order to repay creditors to the greatest extent possible.
Repayment Plans & Property in Chapter 13
As suggested above, however, the process in Chapter 13 and its goals are not entirely the same as those of a liquidation bankruptcy. Chapter 13 involves debtors who have sufficient income and means, and who would like to establish a repayment plan to address their debts over time. This significant difference means that there isn't as much of a reason to collect, redistribute, or sell a debtor's property to pay off creditors because the filer intends to repay their debt over the duration of their repayment plan (typically 3 to 5 years).
On the bright side, this means that the law usually lets a Chapter 13 filer retain possession of their property, with a few important exceptions. However, the debtor's property plays an important part of figuring out how much they will have to repay. When figuring out a debtor's repayment plan, the value of their non-exempt property is used to establish a sort of "base-line" for purposes of repaying creditors. In other words, if a debtor owns non-exempt property worth a particular total amount, X, that total X is the minimum that the debtor must offer in their plan of repayment.
For this reason in particular, it is important for bankruptcy filers to learn about the applicable property exemption laws for their jurisdiction, what kind of exemptions they can claim for their property, and how to go about properly claiming exemptions.
Types of Exempt Property
The types of property that are exempt are defined by both state and federal law in the same manner as in a Chapter 7 case. Each of the 50 states has its own law classifying the types of property that are exempt, as well as laying down definitions for the property types. In many cases, these laws also place a limit on the value of certain exempt property.
Some common examples of property that many states include as exemptions include:
- family homes (sometimes referred to in the law as the "homestead");
- personal items, such as clothes;
- household items and furniture; and
These are just some of many types of exemptions that exist to protect various forms of property from creditors. Consulting with a local bankruptcy attorney can sometimes be very helpful as they are familiar with the types of property exemptions available in a jurisdiction, how they apply for exemptions, plus how and when they should be claimed. Properly claiming exempt property can increase the likelihood that a proposed Chapter 13 repayment plan will be affordable and get approved by the bankruptcy court.