Exemptions are assets that can’t be sold or taken away while in a Chapter 13. There are two types – federal and state exemptions – and it’s important to know which to use to give your client the best asset protection and ultimately the lowest plan payment.
The Role of Exemptions
Exemptions are part of the deciding factor for the monthly plan payment. Exemptions can make or break a Chapter 13, so be sure to pay particular attention to this schedule and do your research.
Exemptions also help to protect assets in a bankruptcy. If a creditor wants to take an exempt asset, they have to file a motion with the court. Some exemptions protect the entire asset while some only protect a portion. Be sure to choose wisely.
Tip: The most common motion filed to take an exempt asset is a Relief from Stay. Typically, these are filed when the debtor isn’t keeping up with the proposed plan payments to the secured creditor.
The Value of Exemptions
The plan payment is determined primarily by disposable income and the value of exemptions and non-exemptions. The value of non-exemptions specifies the required minimum percentage paid to unsecured creditors. This amount can sometimes make a Chapter 13 unviable.
Tip: This minimum percentage rule protects unsecured creditors from being worse off in a Chapter 13 than they would have been in a Chapter 7, where they receive a specific percentage of the sold non-exempt assets.
State and Federal Exemptions
You can use a combination of state and federal exemptions.
Tip: There are federal non-bankruptcy exemptions, however these can only be used with state exemptions, not federal.
Exemptions are specific to certain types of property. The wildcard exemptions which are in the federal and some state exemptions, aren’t specific so they can be used for any type of property.
Tip: This exemption is helpful when your state exemption covers more than the value of your property. For example, if you own a motorcycle that is $8,000 and the exemption is worth $10,000, you can’t use the left over $2,000 on another asset. A wildcard exemption basically gives you more bang for your buck.
Filling Out the Form
Be sure to list all property that could be sold as an asset, the appropriate law specifying the exemption, the current value of the claimed exemption and the value of the property without deducting the exemption.
Tip: Most trustee offices like to know the total exemptions. If the total isn’t available, the trustee or his staff will add it up. It isn’t a bad idea to total the exemptions on Schedule C, that way you know the math is correct. Be sure to add up both columns.
Tip: Research exemptions for every state your client owns property in to find the best place to file. Some states offer better exemptions than others for certain assets. Be sure to look up your local state court, US Bankruptcy Court.
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