Bankruptcy Chapter 13

Why bankruptcy Chapter 13 exemptions matter for confirmation

As a condition of confirmation, debtors must show the court that creditors will receive value equal to or greater than if the case where liquidated under Chapter 7. This bankruptcy Chapter 13 test depends upon the value of available exemptions as applied to the property of the estate. For example, if debtors own stock in the amount of $20,000, and propose a plan that repays creditors $19,000 while retaining ownership of the stock, the bankruptcy Chapter 13 plan will not be confirmed. However, if $20,000 in stock is transferred into an exempt retirement account more than 12 months preceding the filing of a petition, the debtors may retain all exempt assets, and perhaps even other non-exempt assets so long as creditors receive more value from future payments as compared to non-exempt property retained. The amount of future payments in bankruptcy chapter 13 creates a quasi-exemption for non-exempt property.

In practice - selecting bankruptcy Chapter 13 exemptions

In a few states (14), an election of either federal (under the Code) or state exemptions is permitted in bankruptcy chapter 13, which allows debtors greater flexibility when optimizing the value of exempt property. In all other states, only state exemptions created by state legislatures are allowed. Because of the variation between bankruptcy Chapter 13 exemptions between states, large differences occur in the amount of property retained in the bankruptcy estate. In the most conservative states, the value of exemptions is best described as permitting debts to exist on the threshold of poverty. A few states are quite generous and have become know as "debtor's havens."

The practice of changing state residency before filing bankruptcy Chapter 13 is known as "forum shopping." Courts frown upon forum shopping, but in the practical sense, little can be done to prove the only basis for a change of residency was maximization of property exemptions.