When I File Chapter 13 Bankruptcy, what Property can I Keep?

Property that is Exempt

Exemptions are special bankruptcy rules set forth by each state that allow you to keep certain property when you file for bankruptcy. Typically, there are restrictions on the maximum value of exempt property that you are allowed to keep.

Bankruptcy exemptions are not as critical of an issue for Chapter 13 bankruptcies as they are for Chapter 7. In a Chapter 13 bankruptcy, you are allowed to keep property whether or not it is exempt, as long as your Chapter 13 plan is approved by the bankruptcy trustee.

However, bankruptcy exemptions are still an important factor in a Chapter 13 bankruptcy. Exemptions play a part in how much money you will have to pay to unsecured creditors via your Chapter 13 payment plan. If you have a lot of property that is exempt, it will lower the amount of money you will have to pay to unsecured creditors through your plan.

Because each state is different, you should consult an experienced bankruptcy attorney in your state to discuss the exemption laws. Common exempt property typically includes…

  • Your personal vehicle (usually two vehicles if you are married)
  • The home in which you live
  • Miscellaneous personal property like…
    • Your pets
    • Books, magazines etc.
    • Common household appliances
    • Your clothes
    • Typical household furniture and furnishings
    • Wedding rings, watches, and some jewelry
  • Retirement accounts and pensions
  • Certain insurance policies
  • Equipment, machinery, and tools used for your business
  • A limited amount of cash on hand and money in a bank account

Property that is Secured by Lien or Collateral

If your property is secured by collateral or lien, it is a secured debt. When you file for Chapter 13 bankruptcy you are typically allowed to keep all secured property, as long as you continue to make and stay current on your payments. These payments may be paid through the Chapter 13 plan, outside of the Chapter 13, or through a combination of both.

The Chapter 13 Cramdown

The cramdown is a special option available only to those who file for Chapter 13 bankruptcy. Essentially, the cramdown reduces how much money you owe on an investment home, a second home, or an automobile. This is a great opportunity if you are up-side-down on your property because the value will be reduced to its actual market value, instead of what you owe on the mortgage or loan. Unfortunately, a cramdown is not available for your primary residence.

In order for a cramdown to be included in your bankruptcy, it must be proposed when your Chapter 13 plan is submitted for approval. If you are approved to pay the lower amount, you will be eliminated a significant amount of debt.

The eliminated debt doesn’t get erased entirely. Rather, it will be treated as unsecured debt. But because you are likely paying only a small percentage of your unsecured debt through the Chapter 13 plan, you will only pay a fraction of the total debt eliminated through the cramdwon. Consequently, cramdowns almost always save the bankruptcy filer a significant about of money.

A cramdown can apply to a vehicle or a home, but they are rarely used for homes. This is because most courts will require the entire balance of your mortgage to be paid by the end of your Chapter 13 plan. Since payment plans only last from three to five years, this means you will have to pay off your entire mortgage in that time-frame. As a consequence, your monthly plan payment will be extremely high. There are rare circumstances, however, where a cramdown on a home might be worthwhile.