Exemptions play an important role in both Chapter 7 and Chapter 13 bankruptcy. In Chapter 7 bankruptcy, exemptions help determine which property you get to keep. In Chapter 13 bankruptcy, exemptions help determine how much you’ll have to pay to your unsecured creditors, which can mean the difference between a confirmable plan and getting knocked out of Chapter 13.
Exemptions allow you to keep a certain amount of assets safe in bankruptcy, such as an inexpensive car, professional tools, clothing, and a retirement account. If you can exempt an asset, you don’t have to worry about the bankruptcy trustee appointed to your case taking it and selling it for your creditors’ benefit. Many exemptions protect specific property types, such as a motor vehicle or furniture, up to a particular dollar amount. Sometimes an exemption protects the entire value of the asset. Some exemptions, called “wildcard exemptions,” can be applied towards any property you own. Unfortunately, at this time there is no wildcard exemption in Utah. That may change in the future.
How Do Bankruptcy Exemptions Work?
Exemptions play different roles depending on whether you are filing a Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a liquidation bankruptcy where the appointed trustee sells off your nonexempt assets to pay your creditors. Exemptions help you protect your assets in Chapter 7 bankruptcy because the bankruptcy trustee can’t sell exempt property. For example, if your state has a $5,000 motor vehicle exemption and you only have one car worth $4,000, then you can keep it. For more information, see Exemptions in Chapter 7 Bankruptcy.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy allows you to keep all your property and reorganize your debts (which can mean paying less on some of them). However, the amount you must pay particular creditors still depends on how much property you can exempt. Non-priority unsecured creditors (such as credit card issuers) must receive an amount equal to your nonexempt assets. So in Chapter 13 bankruptcy, exemptions help keep your plan payments low by reducing the amount you must pay creditors
State and Federal Bankruptcy Exemptions
Each state has a set of bankruptcy exemptions. Federal law provides an exemption set, too. Some states require you to use the state exemptions; others give you the option of choosing either its set of exemptions or the federal system (you cannot mix and match the two). Which state’s exemption laws you’ll qualify to use will depend on where you lived during the last two years (called the “domicile requirements.”).
Federal Non-bankruptcy Exemptions
In addition to state and federal bankruptcy exemptions, there is a set of federal exemptions that exist under non-bankruptcy law. These exemptions function similarly to bankruptcy exemptions in protecting your property in bankruptcy. However, federal non-bankruptcy exemptions are only available to you if you are using your state’s exemptions (you cannot combine the federal bankruptcy and non-bankruptcy exemptions). If you are using state exemptions, then you can use the non-bankruptcy exemptions in addition to those
How Do I Use The Homestead Exemption?
Like all of your property, the equity in your home is an asset in bankruptcy. Bankruptcy exemptions, including the homestead exemption, allow you to protect property that you’ll need to maintain a household and employment. Bankruptcy exemption amounts vary by state, so the amount you’ll be able to protect will depend on where you live. Also, the bankruptcy chapter you file will determine what will happen to your home if you can’t protect all of the equity.
The bankruptcy trustee sells nonexempt property in a Chapter 7 bankruptcy. If your house has nonexempt equity, the bankruptcy trustee will do the following:
• sell the home
• pay off the mortgage
• reimburse you the amount of the homestead exemption, and
• use the remaining proceeds to pay fees and your unsecured creditors (such as credit card balances, utility and medical bills, and personal loans).
By contrast, a Chapter 13 bankruptcy trustee won’t sell your property. Instead, you can keep nonexempt property, but at a cost. You must pay an amount equal to the nonexempt portion through your Chapter 13 repayment plan. Making the required payment can be problematic if you have lots of nonexempt equity in your home. If you don’t have the income to do so, it’s unlikely that the court would approve (confirm) your three- to five-year repayment plan.
Understanding the Role of the Bankruptcy Trustee
When you file a bankruptcy case, the court appoints an official called a “bankruptcy trustee” to administer it. The trustee reviews the paperwork filed with the court, as well as additional documents called 521 documents; sent to the trustee shortly after that.
The 521 documents include paycheck stubs, bank statements, income tax returns, and any other items specially required by the trustee assigned to your matter. For instance, it’s not uncommon to provide your most recent car loan or mortgage statement, or the marital settlement agreement from your divorce. Also, all bankruptcy filers must attend at least one court appearance called a 341 meeting of creditors. During the session, you can expect the trustee to do the following:
• place you under oath
• verify your identification and the accuracy of your petition
• inquire about unusual details found in your bankruptcy paperwork
• ask standard questions asked of everyone in attendance, and
• allow creditors present to ask questions about your case.
A Chapter 7 trustee may choose to sell all nonexempt property and distribute the proceeds to your creditors. A Chapter 13 trustee won’t sell your property. Instead, the trustee will evaluate the appropriateness of your three- to five-year repayment plan including whether you’re paying for nonexempt property. If it fails to meet requirements, the trustee will file an objection asking the court to reject it and argue the same at the confirmation hearing. If the plan meets required standards, the trustee will support the plan’s confirmation. Further, the trustee will distribute the monthly plan payments to creditors.
What Is My Homestead Exemption Amount?
The homestead exemption is different for each state. A federal exemption system exists under federal law, as well. Your state decides whether you can choose between the state and federal system (you must pick one or the other), or whether you must use the state scheme. Some states allow you an unlimited or a very high homestead exemption amount, but most protect a modest amount of equity, and a few states don’t have one at all. To find the homestead exemption amount in your state (and other exemptions) and to determine whether you can use the federal bankruptcy exemptions, go to Bankruptcy
Exemptions by State.
Homestead Exemption Domicile Requirement
In an attempt to prevent people from shielding their assets by moving to and buying a house in a state with an unlimited homesteads exemption, federal law places restrictions on the homestead exemption. In order to take advantage of a state’s homestead exemption, you must have purchased your home at least 40 months before the bankruptcy (if you sold your home and bought a new one in that same state with the sale proceeds, then the time you owned your first home will still count toward the 40-month requirement).
Exemptions in Chapter 13 Bankruptcy
Bankruptcy exemptions help give filers a fresh start by allowing them to keep property they’ll need to maintain a home and job. Exemptions also help determine the amount a debtor must pay in a Chapter 13 repayment plan. Even though a filer can keep all property in Chapter 13, it comes at a cost. The debtor must pay creditors the value of any nonexempt property—things that aren’t covered by an exemption in the three- to five-year repayment plan. In this article, you’ll learn more about the role exemptions play in Chapter 13 bankruptcy.
Protecting Property With Exemptions in Chapter 13 Bankruptcy
Bankruptcy exemptions allow you to protect property such as household goods, some equity in a house and car, and a qualified retirement account. Exemptions don’t cover non-essential luxury items, like boats or vacation cabins (nonexempt property). Not only do exemptions protect essential property in both Chapter 7 and 13, but they also ensure that creditors get paid what’s owed them. The way each chapter achieves this is slightly different, however. Here’s how it works:
• Chapter 7 bankruptcy—a “liquidation” chapter. If you cannot exempt an asset in this chapter, the bankruptcy trustee appointed to the case will sell it, return any exemption amount you’re owed, and pay your creditors with the amount that remains after deducting sales costs.
• Chapter 13 bankruptcy—a “repayment” chapter. By contrast, the Chapter 13 trustee won’t sell your nonexempt assets. Instead, you’ll pay the nonexempt portion to your unsecured creditors through your repayment plan.
Calculating a Chapter 13 Repayment Plan Payment
In a Chapter 13 bankruptcy, you propose a plan to repay some or all of your debts through monthly payments that you’ll make to a bankruptcy trustee. There are a lot of complicated rules that go into a repayment plan, but in general, the amount you’ll pay will depend on your:
• monthly living expenses
• the amount and type of debt that you owe, and
• the property you own.
The first step is to determine your disposable income by deducting allowable expenses from your monthly income. Then you’ll multiply your disposable income by the number of months in your repayment plan. The second step is to determine the value of your nonexempt assets. Each state allows filers to keep some property using the state’s bankruptcy exemptions. Nonexempt assets are those things that you can’t protect with a bankruptcy exemption. In Chapter 13, you must pay your creditors the value of your nonexempt assets in your repayment plan.
The third step is determining which debts you must pay in full in a Chapter 13 plan. These debts include mortgage and car payment arrearages (if you plan to keep the house or car), recently incurred income tax debt, and support arrearages. Once complete, you’ll have three numbers in front of you. Over the course of your plan, you’ll be required to pay the greater of:
• your disposable income, or
• the value of your nonexempt property plus the total of the debts you must pay in full.
By complying with this formula, you’ll satisfy what’s known as the “best-effort” rule in Chapter 13 bankruptcy. Keep in mind that calculating a repayment plan is complicated. This simplified explanation shouldn’t be used as an instructional guide but rather to aid understanding only.
Property and Debts That Increase Your Chapter 13 Repayment Plan Payment
People who don’t own much nonexempt property and don’t have any debts that they must pay in full will have an easier time drafting a confirmable plan (a plan that the judge will approve at the Chapter 13 confirmation hearing). Because the good faith rule requires you to contribute all of your “disposable income” to your plan, pay off certain debts, and pay at least the value of your nonexempt property over your three- to five-year repayment plan, low-income filers often can’t meet the good faith requirement.
Exemptions in Chapter 7 Bankruptcy
When considering filing for Chapter 7 bankruptcy, the first thing most people want to know is how much property they’re allowed to keep. The answer largely depends on the following:
• the type of property you have
• how much that property is worth, and
• the bankruptcy “exemptions” that you can use.
When you file a Chapter 7 bankruptcy, a bankruptcy trustee is appointed and given the authority to sell your assets to pay your creditors. However, filing for bankruptcy doesn’t mean that you have to give up all of your property. Bankruptcy exemptions allow you to keep a certain amount of property so that you can make a fresh start after the bankruptcy. In a Chapter 7 bankruptcy, if you can exempt an asset, the bankruptcy trustee cannot sell it to pay your creditors. How much property you can keep in a Chapter 7 bankruptcy will depend on your assets’ value and the exemptions you can claim. Thanks to exemptions, most Chapter 7 filers keep all or most of their property.
Chapter 7 Bankruptcy Estate
All of the property you own when you file for bankruptcy, except for most pensions and educational trusts, become part of what is known as the estate when you file for bankruptcy. For instance, the following assets will be part of your bankruptcy estate:
• property in your possession
• property in someone else’s possession (such as an item you’ve loaned to a friend)
• property you’ve recently given away
• property you haven’t yet received but are entitled to
• proceeds from your property (such as rental income or dividends)
• certain assets you receive within 180 days after filing (for example, an inheritance or lottery winnings), and
• your share of marital property.
The bankruptcy trustee will assume control of the property in the bankruptcy estate throughout your case. What will happen to it in Chapter 7 bankruptcy will depend on whether you can protect it with an exemption.
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