Given that debtors in chapter 13 New York bankruptcy can keep their assets, it’s unsurprising that one would think that exemptions play no role in such cases. In chapter 7, it’s clear: The exemptions reduce the size of the bankruptcy estate to ensure that debtors can keep a reasonable amount of their property. But exemptions exist in chapter 13 too. Here’s how.
Recall that there are three conditions that a chapter 13 repayment plan must meet to pass confirmation:
- All priority claims must be paid.
- Creditors must receive more than if debtors had filed chapter 7.
- Debtors must pay as much of their disposable income as possible to cover their non-priority debts.
If you think about it, if exemptions play a role in chapter 7, then logically they must apply to whether creditors are better served by a chapter 13 case over chapter 7 one. For this reason, New York debtors must carefully compare their options under the state versus federal exemptions.
In particular, it means that debtors must consider what they would owe to unsecured creditors under their repayment plan based on their exemptions. So for example, under the New York exemptions if a debtor expects to apply an exemption to a diamond ring appraised at $2,000, then the remaining non-exempt value would be $1,000. In chapter 7, the debtor would have to choose to either sell the ring or apply a $1,000 wildcard exemption to keep it. In chapter 13, by contrast, the debtor would need to promise to pay the creditors $1,000 more under the plan to ensure that they receive as much as they would have if the debtor had filed chapter 7. Fortunately, the debtor can divide the $1,000 over the life of the plan, which can last from three to five years.
Exemptions in chapter 13 can involve some more complicated arithmetic, especially for New York debtors. As I wrote a while back, both the federal and state exemptions give debtors different options for covering the costs of some assets. The state exemptions are great at protecting real estate, but the federal exemptions can keep cash out of the bankruptcy estate. Debtors who don’t take the New York homestead exemption or don’t use all of the federal exemption can exempt other assets. Because of the math involved, it’s possible for some debtors to go through a “virtual” chapter 7 bankruptcy to minimize their plan payments in their actual chapter 13 case.
The strategizing that can be required to create a repayment plan that best serves the debtor is a compelling reason to hire an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.