What are Exemptions Used for in Chapter 13 Bankruptcy?

In a chapter 13 bankruptcy, you do not need to worry about any property being liquidated, and that is not what the exemptions are for. Instead, it is a way to ensure that your creditors get at least as much money as they would have had you filed for chapter 7.

It’s a rule called the “best interest of creditors test”, and it works like this. Consider that you are filing for chapter 13 and you have a car worth $5,000. If you had filed for chapter 7 in New York, you would be able to exempt $2,400 of that equity, so you would need to redeem $2,600. That means your creditors would be entitled to $2,600 in a chapter 7 case.

Your chapter 13 repayment plan must repay at least that much to your creditors. If you cannot afford to pay back the same amount your creditors would receive in a chapter 7 case over the 3-5 year repayment plan, your chapter 13 case will likely be dismissed and converted to a chapter 7 case.

Talk to a Bankruptcy Lawyer if you're thinking about filing for a chapter 13 bankruptcy. You'll want expert advice on how to get the smallest monthly payment while getting rid of unsecured debts.