Exemptions play a less straightforward role in a Chapter 13 bankruptcy than in a Chapter 7 bankruptcy. A debtor who files under Chapter 13 will keep their assets and develop a repayment plan to pay off their debts, so they do not need an exemption to avoid losing an asset. However, exemptions affect the monthly payments under the Chapter 13 repayment plan. This is because payments under the plan are calculated according to the value of the debtor’s non-exempt property.
The Impact of Exemptions Under Chapter 13
In devising a repayment plan under Chapter 13, a debtor will need to calculate their income, property, debts, and expenses. The key factors in this situation are the debtor’s disposable income and the value of their non-exempt property. Calculating your disposable income involves calculating your monthly income and subtracting your living expenses from it. You then will need to multiply the result by the number of months in your repayment plan, which will last for 36 to 60 months (three to five years).
Meanwhile, you will need to determine which assets are exempt and subtract that value from the total value of your assets. In some cases, an asset may be exempt only in part because the asset is worth more than the value of the exemption.
Calculate Both Values
Filers in a state with the option to use either the state or federal exemption system may benefit from calculating their possible exemptions under each before making the choice.
Once you have calculated the value of your disposable income and the value of your non-exempt property, you will need to pay the greater of these amounts to the bankruptcy trustee. They will use it to pay off your unsecured debts. (Secured debts are attached to a specific asset and receive priority. Creditors that are owed these debts will need to be paid first and in full if the trustee sells the asset.)
Debtors with Substantial Non-Exempt Property
If you have a meaningful amount of income and do not own a significant amount of non-exempt property, you should be able to get your Chapter 13 repayment plan approved. People who file under Chapter 13 often are in this position. They earn enough to avoid liquidating their assets under Chapter 7 but not enough to pay off their debts while meeting the cost of living in their area. Meanwhile, they might not yet have acquired a home or substantial property.
It may make more sense to sell high-value assets to pay debts rather than file for bankruptcy.
If you do not have much income and own a significant amount of non-exempt property, on the other hand, it may be harder to get your plan approved. Filing under Chapter 13 involves meeting a good-faith requirement. This means that a debtor must contribute all of their disposable income to the repayment plan while paying at least the value of their non-exempt property. If you have a home and a car but are making minimum wage, for example, Chapter 13 may not be a feasible option for you. Your disposable income may not be enough to cover the minimum required payment, even in a plan that extends over five years. A debtor who is in this position may prefer to sell off the high-value assets to help pay their debts rather than filing for bankruptcy. Or they may sell off the assets to reduce the amount that they owe and then file under Chapter 7 or Chapter 13 to handle the remainder.