Bankruptcy Chapter 13 Exemptions

The role of Chapter 13 bankruptcy exemptions in the test for confirmation

Many debtors mistakenly believe that exemptions are irrelevant in Chapter 13 cases. But the Code is clear, as a condition of confirmation of a plan, debtors must prove that creditors will be compensated by the plan in an amount equal to or above the distribution if filed under Chapter 7. Because of test for confirmation, bankruptcy Chapter 13 exemptions do play a vital role and prevent debtors from retaining excessive liquid assets during reorganization.

How to keep homestead property safe in Chapter 13

In all cases, Chapter 13 debtors must make regular payments for the benefits of their creditors. Over the life of the plan, each creditor (in theory) will receive at least some value. Compared to typical Chapter 7 cases, this distribution alone will satisfy the confirmation test. Yet, if a hypothetical debtor owns stock with a liquidation value of $20,000, the amount of distribution under the plan becomes highly relevant. If the stock is exempt (i.e. a qualified retirement account exemption), then the debtor may retain all stock. But if the stock is not exempt, the total distribution to creditors will be compared to the total value of immediate liquidation.

In practice, the amount of non-exempt assets retained is a function of the percentage pay-out to creditors over the life of a proposed plan. Using Chapter 13 bankruptcy exemptions wisely greatly increases the total value of assets retained during the plan. With careful planning within the boundaries of transfer limits, and the precise calculation of payout value to creditors, the best Chapter 13 lawyers craft proposals to just meet minimum requirements and receive confirmation.