Bankruptcy is a legal proceeding that allows individuals to avoid liability for their debts and reorganize their financial life. Filing for bankruptcy is supposed to give you a fresh start. However, the fear of losing valued assets makes it difficult for most people in a financial crisis. Depending on your income and assets, you can file for bankruptcy under chapter 7 or 13. Under Chapter 13 bankruptcy, you can keep all of your assets by making repayment plans to pay your creditors to an agreed upon amount.
You can use the bankruptcy exemptions if you wish to retain your property. While these exemptions allow you to keep assets in a liquidation bankruptcy, they can help reduce the amounts you must cover in the repayment plan in Chapter 13. This makes it easier for you to pay the creditors within your income range. Bankruptcy proceedings are complicated and could be filled with misconceptions. For a better understanding of the exemptions that apply to your case, you will require the guidance of a competent bankruptcy attorney.
Exemptions in Chapter 13, Bankruptcy
With Chapter 13 bankruptcy, the court allows you to formulate a repayment plan where you can clear all your debts within a specified period. Many people fear seeking financial relief through bankruptcy with the fear of giving up their assets.
Bankruptcy exemptions help you protect property, like equity to homes and vehicles. However, these exemptions do have limits and might not protect and exempt all of a person’s assets. Most individuals who file for chapter 13 bankruptcy keep their property using the bankruptcy exemptions. Before you think about bankruptcy and how to protect yourself, you must understand the following aspects of bankruptcy exemptions in California:
Residence Exemption
Bankruptcy exemptions will protect you if you meet residency requirements. One of the requirements to start your bankruptcy proceedings is filing your petition in the right court. Each court has the right to decide matters of eligibility. You must have lived for up to two years in California when filing for bankruptcy and then you can use the California exemptions.
Federal Bankruptcy Exemptions are Inapplicable in California
California does not allow you to choose between federal and state exemptions when filing for bankruptcy. If these exemptions apply to your property, you can claim the federal exemptions, which are not in the bankruptcy code. Federal non-bankruptcy exemptions are the exemptions that exist in federal law and will protect your property even when you do not file for bankruptcy. Federal bankruptcy non-exemptions are available for individuals belonging to special groups. You can enjoy the benefits under particular circumstances, including:
- Disability and death benefits.
- Retirement benefits.
- Survivor benefits.
If you belong to the following professions, you can enjoy the exemptions:
- Government employees.
- Seamen.
- Military service members and veterans.
- Individuals on social security.
- Railroad workers.
If you qualify for non-bankruptcy exemptions, you can protect property that you would not protect with typical state exemptions.
You Cannot Claim Double Exemptions
In California, a specific dollar amount is attached to a bankruptcy exemption. When a couple file for bankruptcy jointly, they can receive a double exemption for certain criteria under federal law. In this case, each spouse can protect the same property up to a particular amount. Unfortunately, this is not the case in California for the majority of the exceptions. All the properties that must be exempted must fall within the required values.
Types of Bankruptcy Exemptions in California
There are two systems of bankruptcy exemptions in California:
System One Exemption
System one exemption, also referred to as the 704 Exemptions, will be best for you if you have significant home equity. You can use this exemption to protect property outside bankruptcy proceedings. This type of system applies as follows:
- Homestead exemption. The 704 bankruptcy exemption safeguards a set amount of equity to your primary residence. When filing for chapter 13 bankruptcy, you can exempt your home. Under the new law, you can exempt between $300,000 to $600,000 of your home.
- Motor vehicle exemption. This type of exemption will safeguard your truck, car, or motorcycle. You can be exempt up to $7,500 with the vehicle exemption.
System Two Exemption
Exemptions system two, commonly referred to as the 703 Exemptions, only applies in bankruptcy proceedings, including:
- Homestead exemption. With the system two exemption, you can keep up to $31,950 in personal and real estate property equity.
Calculating a Chapter 13 Bankruptcy Repayment Plan
The repayment plan is the most critical part of a chapter 13 bankruptcy. Since the bankruptcy trustee cannot sell your assets to cover your debts, you must agree on a plan to pay them. Different factors, in your case, play a significant role in determining the amount you must pay each month. You can take the following steps to calculate your monthly payments:
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Determine Your Monthly Income
A repayment plan in bankruptcy starts with your monthly income. The court determines your income by looking into your income for the last six months. If other variances affect your income, you must account for them when discussing the repayment plan. You can file for chapter 13 bankruptcy if you demonstrate a stable or predictable income. When you have determined an income, you can proceed to the expenses.
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Deduct Your Expenses from the Income
Chapter 13 bankruptcy allows you to pay your debts as you continue to cover the payments for your ongoing expenses. By deducting the exact amount of your expenses from the income, you leave an amount that can cover your repayment plan. You can look into a government-generated chart to determine the expenses you can pay before you are obliged to pay your creditors.
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Determine Your Disposable Income
After deducting all your expenses, what’s left is known as disposable income. The disposable income is distributed to your debts according to priority. Creditors will file proof of claim documents that indicates the amount they believe you owe.
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Calculate Your Monthly Payments
Some debts must be paid in full when determining your monthly payments. Debts like alimony, taxes, and child support are priorities. While bankruptcy exemptions could reduce your installments, you must fully cover the debts.
Other debts you must pay are secured using your home or vehicle. For these debts, the amount you pay on these depends on when the loans are set to mature and whether you are current on these payments when you file for chapter 13. After paying your living expenses and priority debts, the money you have left can go towards paying unsecured debts.
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Determine the length of Payments
A chapter 13 bankruptcy repayment plan generally lasts between three to five years. The length of your plan varies depending on your income and expenses. After making your last payments from the plan, the court allows you to discharge the remaining unsecured debts.
In every chapter 13 bankruptcy repayment plan, you must pay your mortgage arrears, car loan arrears, and priority debts. Your non-dischargeable debts, the value of a non-exempt property, and your non-dischargeable debts play a significant role in the type of plan applicable to your case:
Typical Repayment Plan.
After deducting all allowed expenses from their income, most debtors will have some money left. The amount that remains for unsecured creditors is small.
0% Repayment Plan
Some debtors do not have enough income to pay for their unsecured debts. Typically, such individuals could qualify for chapter 7 bankruptcy but might be choosing a chapter 13 for various other reasons. If you file chapter 13 bankruptcy to protect your assets, the court may allow you to use chapter 13 plans to bring your overdue payments up to date. Even under these circumstances, you will receive a discharge for the unsecured debt towards the end of your repayment plan.
In the zero percent repayment plan, debtors must have enough income to pay the following arrears within your three to five-year repayment plan:
- Mortgage arrears.
- Remaining loan balance vehicles that you want to keep after the bankruptcy, if the loan matures within the chapter 13 period.
- Balance on priority debts like alimony and child support.
100% Repayment Plan
People commonly file for bankruptcy because they have too much interest on credit cards or high medical bills that they cannot cover. When you have a high income and many assets, the court will not allow you to eliminate your debts. Instead, the court offers you a 100% repayment plan. In this plan, you must pay all your creditors in the court-monitored plan. The huge advantage of doing this is that you are no longer responsible to pay any interest to your unsecured creditors.
By filing for bankruptcy, you can keep your payments current. Using the bankruptcy exemption, you can keep your monthly payments lower, which allows you to plan your finances appropriately.
There are priority debts that you must pay in fill in full even with your repayment plan, including:
- Federal and state taxes.
- Back child support or alimony payments.
- Fraud-related court judgments.
Exemptions for Debts Secured by Property
You must pay your monthly installments if you wish to retain ownership of an asset that secures a debt. A secured debt is a credit taken using the property as collateral. If you do not pay the debts, the creditor will resell the property to recover their money. If you have a vehicle or mortgage, you can return the asset to the lender or keep paying your installments:
- Arrearages. You can catch up through your bankruptcy repayment plan if you have fallen behind on your payments. Using the state exemptions, the amount you must pay to your creditors is significantly lower, spreading your balance. Whether or not you are current on your payments is determined by the payment plan and not the original agreement with the creditors.
- Lien strip. When you explore your chapter 13 bankruptcy exemptions, you may not need to pay a junior mortgage in your repayment plan. If you have multiple mortgages on a home whose value is lower than the senior loans on the property, you can strip the junior lien with chapter 13 bankruptcy. The benefit of a lien strip exemption is that you would pay less for your monthly installments.
- Cram down exemption. You can reduce the amount you owe to creditors on other secured debts. However, this rule will not apply to your residence. Through your repayment plan, you must cover the entire cram-down.
Bankruptcy Exemptions for Debtors with Substantial Non-exempt property
If you have a high income and a low amount of non-exempt property, your chapter 13 bankruptcy repayment plan could be easily approved. Individuals who qualify for chapter 13 bankruptcy have enough income to avoid liquidating their assets in chapter 7 bankruptcy but may have yet to acquire total equity in their home or other properties.
On the other hand, when you have a high income and a significant amount of non-exempt property, it may be impossible to receive approval for your repayment plan. Declaring bankruptcy under this chapter has a good faith requirement. You must contribute all your disposable income towards repaying your creditors.
When your income is insufficient to pay the debts even with the five-year repayment plan, it would be wiser to sell some of your valued assets and allow chapter 13 exemptions to protect the rest. Filing for Chapter 13 bankruptcy is a complex process. You will need to draft a repayment plan, comply with all the bankruptcy rules, and determine how to make the process easier legally. Therefore, seeking legal guidance is critical.
Find a Skilled Bankruptcy Attorney Near Me
Bankruptcy is complicated in many ways. A common misconception about this legal proceeding is that you will lose your property after filing. However, there are different types of bankruptcy, and property and assets are handled differently. Bankruptcy exemptions have made it easy for individuals filing for chapter 13 to keep their assets.
Instead of liquidating the assets to pay the debts, you can retain ownership of the property and make a plan to repay your debts within three to five years. Sometimes, the repayment plan that a creditor accepts is too high for you to manage with your current income and financial crises. Fortunately, the exemptions can help you keep your payments low and manageable.
The type of bankruptcy exemptions you choose will determine the assets you can save. Understanding the basics of bankruptcy exemption is critical to your bankruptcy filing. Therefore, you must hire and retain a skilled bankruptcy attorney throughout the process.
At Sacramento Bankruptcy Lawyer, we will help you understand the bankruptcy basics and guide you through the legal proceedings to ensure a fresh start. We serve clients undergoing bankruptcy in and around Sacramento, CA. Contact us today at 916-800-7690 and allow us to guide you through the challenging times.
