Exemptions in bankruptcy enable filers to have a new beginning by allowing them to retain some assets like their primary residence. Exemptions also play an essential role in determining the amount you should pay in a Chapter 13 repayment plan. Unfortunately, many people do not understand how bankruptcy exemptions work under Chapter 13 bankruptcy. This is where a bankruptcy attorney comes in to guide you through the process.
Exemptions In Chapter 13, Bankruptcy
You could use bankruptcy exemptions to determine the amount of debt you need to repay in a Chapter 13 bankruptcy repayment plan. Unlike a Chapter 7 bankruptcy, which involves disposing of your assets to repay your creditors, a Chapter 13 bankruptcy involves coming up with a repayment plan to repay your debts. You can keep everything you own by filing for Chapter 13 bankruptcy. Bankruptcy exemptions in Chapter 13 work as follows:
- You must repay creditors to retain "nonexempt'' property not protected through a bankruptcy exemption.
- You can use bankruptcy exemptions to protect crucial property like household goods, equity in a house or car, or a qualified retirement account.
Nonexempt Property And Creditor Payment In Chapter 13 Bankruptcy
Regardless of the bankruptcy chapter, exemptions often protect the same amount of property. What happens to the "nonexempt" property you cannot protect using a bankruptcy exemption, on the other hand, depends on whether you file for a Chapter 7 or a Chapter 13 bankruptcy.
You could be wondering how creditors access payment for the nonexempt property in Chapter 13. Typically, in Chapter 13, you are required to pay the amount a creditor would have received if you had filed for Chapter 7 bankruptcy. This is according to the "best interests of creditors test." To apply this test, the bankruptcy trustee calculates the property that would be available for liquidation to pay creditors after the exemptions if you had filed a Chapter 7 bankruptcy. In a hypothetical Chapter 7 bankruptcy, the more property protected by the exemption, the less the amount available for distribution to the creditors. Some individual bankruptcy cases are "no asset "cases. In a no-asset case, the debtor retains everything.
Chapter 7 And Chapter 13 Bankruptcy
You need to understand what happens to the assets you cannot protect with an exemption since the process for paying creditors in Chapters 7 and 13 differs. Chapter 7 bankruptcy is usually known as a liquidation chapter. If you fail to exempt property in this chapter, the bankruptcy trustee will sell it. The trustee will deduct the sales costs and the trustee’s fee. He/she will also pay the creditors and return the remaining amount to you.
On the other hand, Chapter 13 bankruptcy is usually known as a repayment chapter. Unlike Chapter 7, the Chapter 13 bankruptcy trustee cannot sell the nonexempt property even if you request them to do so. Under Chapter 13, you are required to pay the amount equivalent to the nonexempt portion your creditors could have received in Chapter 7. It is a threshold amount; you could pay more if you have many debts, which you must pay in full. You could also pay more if you earn a higher income.
Protecting Your Property In Chapter 13 Using Bankruptcy Exemptions
Any person who files for bankruptcy in the United States cannot lose everything. Every state in the United States has a guideline on the property a bankruptcy filer can keep. In addition, some states give filers options to choose either federal bankruptcy exemptions or state exemptions.
You are required to disclose everything you own while preparing your bankruptcy paperwork. In addition, you must show the items that bankruptcy exemptions protect. The Chapter 13 bankruptcy trustee in charge of your case will examine your exemptions to ensure accuracy.
Typically, you can keep furniture and other personal belongings because household items are not worth much. But, unfortunately, you will be limited when it comes to high-cost properties like collectibles, investments, savings, family heirlooms, jewelry, homes, and other expensive assets.
You could use bankruptcy exemptions to protect everything you own. For example, while some individuals have a sufficient amount of fully and partially nonexempt assets, others have luxurious properties that many people do not require, like vacation cabins or boats.
The Role Of A Bankruptcy Trustee In Chapter 13
Chapter 13 bankruptcy permits you to pay creditors all or some of what you owe via a three-to-five-year repayment plan. In your case, a Chapter 13 bankruptcy trustee monitors the plan's administration. The trustee performs several duties, including:
- Collecting planned payments and distributing funds to creditors.
- Reviewing the bankruptcy paperwork.
- Implementing the terms of the Chapter 13 plan.
- Assessing the proposed plan for compliance with bankruptcy laws.
Many bankruptcy filers do not meet the bankruptcy judge during the process. They usually meet with bankruptcy trustees charged with their cases. The bankruptcy trustee should ensure you are eligible, so you could expect the trustee to do the following:
- Review your bankruptcy forms.
- Compare the figures in your forms to the financial documents to verify your information.
The petition and schedules include your debts, assets, monthly expenses, and income. In addition, the trustee will utilize your bank statements, paycheck stubs, tax returns, and other items to confirm your financial disclosures.
The trustee will look at your proposed repayment plan, which indicates how you intend to repay your creditors. The trustee's primary duty is to ensure that your repayment plan is fair to your creditors. If there is a problem with your repayment plan, the trustee will bring it up at the meeting of creditors and try to resolve the matter informally. Finally, the trustee will file a motion with the bankruptcy court, asking for a resolution if you fail to reach a consensus.
State And Federal Bankruptcy Exemptions
Every state in the U.S. has a set of bankruptcy exemptions. In addition, the federal law also offers a federal bankruptcy exemption set. Most states allow people to use the state exemptions, while few give people options to choose the state or the federal bankruptcy exemption. However, you should only choose one and avoid mixing the exemptions.
You will be eligible for state exemption depending on where you resided during the last two years, referred to as "domicile requirements.'' Federal bankruptcy exemptions protect homesteads, personal property, public benefits, domestic support, and many retirement accounts. Married individuals are allowed to file this exemption together in a joint bankruptcy. It combines both partners' debts and property into the same bankruptcy case. Filing a joint bankruptcy is often regarded as the best move; couples do not have to file a unit.
The Effects Of Bankruptcy Exemptions On Your Chapter 13 Payment Plan
Under Chapter 13 bankruptcy, you must provide a plan to repay some or all of the debts through monthly payments, which you will make to a bankruptcy trustee. Typically, the amount you will pay will be based on the following:
- Your debt.
- Nonexempt property.
- Your monthly living expenses.
- Your income.
You will determine the amount to pay by deducting the allowed expenses from your income. You will only be eligible for Chapter 13 if you can secure the amount that can cover the entire debt you must pay. However, this is not the only criterion. Your creditors also need to receive a similar amount as they would have received if you had filed for Chapter 7.
Examples Of The Effects Of Bankruptcy Exemptions On Chapter 13 Payment Plan
Understanding and meeting the requirements of a Chapter 13 bankruptcy payment plan can be complicated. The following examples show how exemptions can affect your payment.
For example, you could earn a minimum salary as a chef and find it hard to pay your bills after a divorce. However, you fail to qualify for a Chapter 7 discharge even after being awarded spousal support in the divorce settlement. You also fail to protect your $20,000 recreational vehicle and $50,000 home equity with bankruptcy exemptions. This could make you consider filing for Chapter 13 bankruptcy to keep the house and the car. After consulting your bankruptcy attorney, you discover your monthly discretionary income is $200. However, since you have $70,000 in nonexempt property, you must pay a minimum of $1,167 per month in a 60-month repayment plan. In this case, you are not eligible for Chapter 13 bankruptcy because your salary as a chef is not enough to support the required repayment plan.
On the other hand, you could be working in the technology industry and earning a lot of money. You could be eligible for Chapter 7 but find it hard to pay a $2,400 credit card debt because of the high cost of living. Probably the only asset you have is an old vehicle and an old futon that you can protect with bankruptcy exemptions. After consulting your bankruptcy attorney, you discover that you will pay your discretionary income of $275 monthly in a 60-month repayment plan amounting to $16,500. Any remaining credit card balance will be wiped out when you complete the plan. However, you decide to look for other options after learning that you will not save anything after paying your attorney and the bankruptcy trustee.
The California Homestead Exemption
Individuals eligible to use California homestead exemption can use it to keep some equity in a residential home, both outside and inside the bankruptcy. However, the process differs based on when you plan to use the homestead exemption.
Homeowners in California's System 1 can exempt up to $600,000 of equity in a house. Homeowners in California's System 2 can be exempt from up to $31,950 of home equity. The Judicial Council of California usually updates the amounts every three years.
The homestead exemption in California System 1 often applies to property where you live, including condominiums, planned development, community apartment, stock cooperative, boat, or mobile homes. The homestead exemption in System 1 also applies to the proceeds from your home’s forced sale. You should have received the proceeds six months prior to the bankruptcy. The homestead exemption in System 2 applies to property that the debtor's dependent uses as a home, including a burial plot or a cooperative for the debtor.
The homestead exemption is also applicable as a wildcard exemption. You can use the unused portion to protect any property of your choice if you do not need the whole homestead exemption to protect your home's equity. The money is in addition to the wildcard money, $1,700.
Frequently Asked Questions On Chapter 13 Bankruptcy Exemptions
Several questions are frequently asked regarding Chapter 13 bankruptcy exemptions in California. Some of the questions include the following:
Where Do I Find Chapter 13, Bankruptcy Exemptions?
First, you need to consult your local Chapter 13 bankruptcy attorney. Your attorney will conduct a cursory property review to determine the amount of property you need to pay using your plan.
How Do I Calculate My Chapter 13 Payment Plan?
The rules governing the Chapter 13 repayment plan are relatively complex. However, you can still get an idea regarding the minimum amount you will need to pay. If you are filing Chapter 13 because you are not eligible for Chapter 7, you should do the following:
- Determine the plan length.
- Check whether you meet the ‘’best interest of creditors’’ test.
- Determine if you have ‘’disposable income’’ remaining for debts you do not have to pay in full.
- Determine whether you have sufficient income to pay the required amount plus your monthly expenses.
- Calculate the debts you are required to pay in full in a Chapter 13 plan. For example, if you plan to keep the car or house, the debts could include a car, mortgage payments, and arrearages. Other debts could be unpaid child support, spousal support, and recently accrued income tax debt.
- You will also have to determine the minimum amount you should commit to ''unsecured debts''. The unsecured debts are not related to the car, home, or other assets a creditor placed a lien on or assets you have offered as security for a loan. Deduct the trustee's fees and sales costs from the total value of the nonexempt property.
You will only qualify for a Chapter 13 repayment plan if you earn a substantial amount of money that can pay all your required debts. It is also mandatory that you pay your entire disposable income to creditors. In addition, you must pay your unsecured creditors a minimum of what they could have received under a Chapter 7 bankruptcy.
Can I Start A Business During Chapter 13?
Many Chapter 13 filers operate under strict budget limitations. Most filers do not have sufficient money to start a business during the Chapter 13 plan. However, it depends on an individual's financial circumstances. If you are in a 100% plan and you have extra monthly disposable income, then starting a business cannot be a problem. If the value of the business grows, the business should be regarded as an asset you acquired after the bankruptcy filing and excluded from your bankruptcy case.
If you are paying creditors less than 100% and the business starts generating more income, you could be forced to pay the revenue to your creditors rather than reinvest it in the business. You can also consult a bankruptcy attorney to explain what to expect and assist you in formulating the best strategy.
How Long Is A Chapter 13 Payment Plan?
Your payment plan period ranges between three to five years, based on your income. You can check your plan period by doing the following:
- Add the gross income you and contributing relatives earned over the past six months and multiply by two.
- Compare the answer to your state's median income outlined on the United States Trustee Program website.
Your plan must take five years if the figure is more than your state's median annual income for your household size. However, if your income is less than the median, you could propose a 3-year plan.
Your Retirement Plan In Chapter 13 Bankruptcy
When you file for Chapter 13 bankruptcy, you get to protect your retirement and pension plan funds. However, you could face a few limitations. If you are considering a Chapter 13 bankruptcy, you must understand the essential rules guiding your retirement plan. This could include when you can exempt or protect your retirement account balance and how to avoid losing your retirement funds.
The exemption amounts are unlimited, with a few exceptions, so all the retirement amount accounts are protected. The plans that apply to this exemption include pension plans like:
- Defined-benefit plans.
- Money purchase plans.
- Profit sharing plans.
- Keoghs.
- IRAs (Roth, SEP, and SIMPLE)
- 401(k)s.
- 403(b)s.
However, stock plans, investment accounts, and general savings accounts cannot be protected if they are not ERISA-qualified plans, and generally, many are not. Most states in the United States also do not have exemptions that protect bank and investment account funds. Those that do so offer minimal coverage. As a result, you could quickly lose unprotected money in both Chapter 7 and Chapter 13 bankruptcy.
Find a Bankruptcy Lawyer Near Me
Most people prefer filing a Chapter 13 bankruptcy to a Chapter 7 bankruptcy. If you properly claim exempt property, you can increase the possibility of an affordable Chapter 13 repayment plan. However, it is often complicated to determine the exempt status of the property and come up with a viable Chapter 13 repayment plan. At the Los Angeles Bankruptcy Lawyer, we have a team of lawyers who understand every aspect of Chapter 13 bankruptcy exemptions, and we are ready to walk with you on this journey. Contact us at 424-285-5525 and talk to one of our lawyers.
