Asset Exemptions in Chapter 13

You may have heard that assets that you might lose in a Chapter 7 case can be protected in a Chapter 13 case. Is that always true? Is that a good way to keep an asset you really want to hang on to? How does this work?

Bankruptcy law is essentially a delicate balancing act between the rights of people who owe debts and the creditors to whom those debts are owed. A very basic part of that balancing of rights is the principle that the people who owe the debts get those debts written off, or legally “discharged,” in return for giving the creditors any assets they own beyond what is needed for survival. There is a rather rigid set of rules which determines what assets the debtors get to keep—“exempt” ones—and what they have to surrender to their creditors.

A Chapter 7 case is also called “liquidation.” The Chapter 7 trustee, on behalf of all your creditors, looks over your bankruptcy documents, asks you some questions about them, and determines whether there is anything you own that is not “exempt.” Most individuals who file Chapter 7 bankruptcy own only exempt assets. So the trustee—and the creditors—get nothing from them. A person who does own assets that were not exempt would not be filing a Chapter 7 case, unless they were willing to surrender those non-exempt assets in return for getting the debts discharged.

So if you did have a non-exempt asset that you really needed to keep, you would not file a Chapter 7 case. Say you owned a free and clear vehicle worth $10,000, well over the $3,000 vehicle exemption, and you needed it to get to work—Could Chapter 13 protect it, and do so in a virtually guaranteed way?

Assuming you are single, after the $3,000 vehicle exemption allowed to a single person, that leaves $7,000 not exempt. You would be able to keep your vehicle in a Chapter 13 case if your three-to-five-year payment Plan distributed at least $7,000 to your “general unsecured” creditors, in addition to meeting all the other requirements of Chapter 13. The “general unsecured” creditors are those which 1) are not secured by collateral like vehicles or real estate, and 2) do not get favored treatment as a “priority” creditor like many taxes.

If you think about it, the Chapter 13 accomplishes for the creditors what a Chapter 7 does: getting them the $7,000 in non-exempt value of the vehicle. But in a Chapter 13 case this happens over the course of years through payments instead of months through the Chapter 7 trustee taking the vehicle, selling it, and paying the proceeds beyond the exempt amount—about $7,000—to the creditors.

Is Chapter 13 a guaranteed way to be able to keep this vehicle? There can be debates around the edges that would affect exactly how your Chapter 13 would look, issues like how much the vehicle is actually worth to determine how much you have to pay into the Plan. And you have to successfully complete that three-to-five-year Plan, during which time a lot can happen. Perhaps most important, Chapter 13 should fit the rest of your financial circumstances.

But, if it does, Chapter 13 can be a pretty reliable way to keep for yourself what you would otherwise have to give to your creditors if you filed a Chapter 7 case.