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Discover what it means if the bankruptcy trustee objects to your Chapter 13 plan’s confirmation and what you can do.

If you file for Chapter 13 bankruptcy and your proposed repayment plan violates all applicable bankruptcy laws, the bankruptcy trustee may object to your plan’s confirmation (approval). The following sections will discuss why the trustee may object to your Chapter 13 plan and your options if the trustee does object.

The Chapter 13 Plan and Confirmation by the Court

Chapter 13 bankruptcy is frequently referred to as a reorganization bankruptcy due to the fact that you repay some or all of your debts via a repayment plan. When you first file for Chapter 13, you present the trustee, your creditors, and the court with an initial repayment plan. After filing your case, you must immediately begin making plan payments to the trustee (your first payment is typically due within 30 days). However, your plan does not become permanent until it is confirmed by the court (which can take up to several months). (For more information on the Chapter 13 repayment plan, click here.)

Generally, unless the trustee or one of your creditors objects, the court will approve your plan. However, if you fail to submit a workable plan that complies with all applicable bankruptcy laws, the trustee may object to its confirmation.

When a Trustee May Disagree with Your Chapter 13 Plan

Numerous requirements must be met in order for the court to approve your proposed Chapter 13 plan. Generally, the trustee will oppose your plan if:

• In your plan, you do not pay all of your disposable income to unsecured creditors (learn about how your disposable income affects your Chapter 13 plan)
• You lack the financial means to make your plan payments.
• Your plan does not pass the test of being in the best interests of creditors (which states that your plan must pay your unsecured creditors at least an amount equal to what they would have received in Chapter 7 bankruptcy)
• Your plan excludes certain debts that you are required to repay (learn about debts you must pay back in your Chapter 13 plan)
• Your plan is either too short or too long in duration (learn about how long your Chapter 13 plan must last)
• You do not provide the trustee with all of the necessary supporting documents (such as tax returns or pay stubs).
• you are in arrears with your plan payments, or
• Otherwise, your proposal is not made in good faith. (Learn about the Chapter 13 good faith requirement.)

What Happens If Your Chapter 13 Plan Is Rejected by the Trustee?

One of the trustee’s primary responsibilities in Chapter 13 bankruptcy is to maximize payment to your unsecured creditors. This means that the trustee will almost always argue that you should be contributing more to your Chapter 13 plan. As a result, trustee objections are extremely prevalent in Chapter 13 bankruptcy. (Learn more about the Chapter 13 trustee’s role.)

If the trustee wishes to object to your plan, he or she will typically file a written objection to confirmation with the court, outlining the reasons why the court should reject your proposed plan. If you do not respond to the trustee’s objection, the plan will most likely be denied confirmation by the court. If you wish for the court to approve your plan following the trustee’s objection, you must file a written opposition explaining why you believe your plan is ready for confirmation.

Your Alternatives If the Trustee Disapproves of Your Plan

In the majority of cases, you can:

• rectify your errors
• submit a revised plan, or
• To resolve the objections, negotiate with the trustee.

However, if you are unable to reach an agreement with the trustee, you must be prepared to argue your case before a judge during the Chapter 13 confirmation hearing (discussed below).

Confirmation Hearing under Chapter 13

Following your Chapter 13 bankruptcy filing, the court will schedule a confirmation hearing to determine whether or not to approve your plan. If no objections are raised by the trustee or your creditors to your proposed plan, the court will confirm it at the hearing. (Learn more about the confirmation hearing for Chapter 13 bankruptcy.)

However, if the trustee files an objection to your plan and you are unable to resolve it prior to the confirmation hearing, you must explain to the judge why you believe your plan should be confirmed. Following your presentation, the trustee will have an opportunity to make an argument.

The judge will decide whether or not to confirm your plan after hearing both sides. If the judge determines that additional evidence is required, he or she may also continue the hearing or remand the case for trial or evidentiary hearing.

Defaulting on your Chapter 13 plan (failing to make payments) has a number of unfavorable consequences. This may result in your creditors obtaining court permission to foreclose on your home or repossess your car. Alternatively, the court may dismiss your case or never approve it at all. Discover some of the potential consequences of failing to make a Chapter 13 repayment plan payment, as well as options for resolving your bankruptcy.

After you file for bankruptcy, the bankruptcy court will determine whether your proposed repayment plan is feasible. Even though this “confirmation” (approval) process can take several months, you will begin making payments approximately one month after filing and will maintain current monthly plan payments until confirmation. If you do not keep up with your plan payments, your bankruptcy case will be dismissed.

Confirmations are frequently delayed when a trustee or creditor objects to the proposed Chapter 13 plan at the outset. If the confirmed amount is greater than the agreed-upon three- or five-year repayment period, the plan payment will be adjusted to ensure that you can complete the plan within the agreed-upon three- or five-year repayment period.

Creditors Could Be Exempt From the Automatic Stay

When you file for bankruptcy, an automatic stay is triggered. Except in limited circumstances, the automatic stay prohibits creditors from initiating or continuing collection activities (such as foreclosure or repossession) without first obtaining permission from the bankruptcy court. Due to the fact that the majority of your creditors will be paid through the Chapter 13 plan, they may seek relief from the automatic stay (permission to resume collection activities) if you fall behind on your plan payments. The request is made through the filing of a motion to lift the stay.

You Might Have Your Chapter 13 Bankruptcy Dismissed

Even if the court has already confirmed your case, you run the risk of having your case dismissed if you fall behind on your Chapter 13 payments. The bankruptcy trustee will petition the court to dismiss your case for failure to adhere to repayment plan requirements, and if granted, the court will dismiss your case without granting you a discharge of your debts (qualifying debts will remain unaffected).

What Are Your Chances of Avoiding Bankruptcy?

Financial difficulties during the Chapter 13 process are not uncommon. Even if you fall behind on your Chapter 13 payments, your case will not be automatically dismissed. You will still have options for resolving your bankruptcy and regaining possession of your property.

Eliminate Your Default

Even if the Chapter 13 trustee requests that your case be dismissed, you may still petition the court for additional time to cure (catch up on) your default. This is the simplest option if you missed a few payments due to an emergency but are now back on track and ready to begin repaying your debts. The majority of trustees and judges will grant you additional time if you demonstrate that you are capable of making up for missed payments.

Make Changes to Your Chapter 13 Plan

If your circumstances have changed since you filed bankruptcy (for example, if your income has decreased as a result of a layoff), you may petition the court to modify your plan and lower your monthly payments. This, however, may not be possible if the plan is solely used to pay priority debts and secured debts on property you do not wish to surrender. Due to the fact that these debts must be paid in full, the court will be unable to reduce your Chapter 13 plan payments.

Restore Your Bankruptcy Under Chapter 13

Even if the bankruptcy is dismissed by the court, you may be able to reinstate your case. However, you will typically be required to do so immediately following your dismissal, and you will be required to bring your plan payments current.

Convert to Chapter 7 or Obtain an Accelerated Discharge

Additionally, you may be able to convert your Chapter 13 bankruptcy to a Chapter 7 (in which case you will receive a discharge without making any plan payments). To do so, you must demonstrate that you qualify for a Chapter 7 bankruptcy because you are no longer able to afford a Chapter 13. However, keep in mind that Chapter 7 bankruptcy does not allow you to discharge priority debts or cure arrearages, so converting may not be in your best interest.

Similarly, you may file for a Chapter 13 hardship discharge early. You would, however, be subject to the same restrictions as Chapter 7.

Represent Yourself in a Chapter 13 Bankruptcy

In the majority of cases, you can immediately re-file a Chapter 13 bankruptcy following dismissal. However, you may be prohibited from refiling for six months if you violated court orders or voluntarily dismissed your prior case, particularly if a creditor obtains relief from the stay. These types of filing prohibitions occur when the court “with prejudice” dismisses your case. Additionally, if you file a subsequent bankruptcy within a year of your previous one, the automatic stay will be limited to 30 days, and you will need to petition the court to extend it.

You must propose a plan to repay part or all of your debts when filing Chapter 13 bankruptcy. The bankruptcy judge decides whether your plan can be approved at the confirmation hearing. Continue reading to learn more about the confirmation hearing, including when it takes place, who is invited, and what happens if your Chapter 13 plan is not approved.

The Repayment Plan for Chapter 13

In Chapter 13, you propose a three- to five-year payment plan. The month after you file your case, you’ll make your first payment. The funds are held by the Chapter 13 bankruptcy trustee until the judge approves your Chapter 13 plan, after which they are distributed to creditors.

Hearing on Confirmation

The bankruptcy judge must approve (confirm) your Chapter 13 plan. The bankruptcy court judge will use the confirmation hearing to determine the following:

• whether your plan is feasible and you’ll be able to make the payments on time, and
• whether you filed your plan in good faith or not, your unsecured creditors will receive the same amount of money or more than they would have received if you had filed for Chapter 7 bankruptcy.

Timing of Confirmation

Within 45 days of the 341 meeting of creditors, the court will schedule the confirmation hearing. The hearing will be announced to your creditors at least 28 days in advance.

Attendance

You are not required to attend the confirmation hearing if you are represented by an attorney, but you may do so if you wish. You must appear if you are not represented by counsel, or your Chapter 13 case will be dismissed.

What Takes Place During the Hearing?

You will report to the assigned judge’s courtroom when you appear for the confirmation hearing. Any plan objections that were not resolved before the hearing will be argued by the trustee or creditor when they are called. The judge will consider the arguments and determine whether your plan meets the requirements for confirmation. Both you and your creditors are bound by the plan once it is confirmed.

Objections at the Confirmation Hearing should be planned ahead of time.

The confirmation of your plan may be challenged by your creditors or the Chapter 13 bankruptcy trustee. Among the most common objections are:

• The plan does not commit all available funds for the three or five-year plan period, or it does not commit all available funds for the three or five-year plan period.
• Under the plan, you haven’t adequately provided for creditors.

For example, if you want to keep the property that serves as collateral in Chapter 13, you must pay all past due amounts owed to secured creditors, which are usually the holders of a mortgage or car loan. In addition, you must pay off all of your unsecured debts, such as credit card balances, medical bills, and personal loans, with your disposable income. Furthermore, these creditors cannot receive less than they would have received if you had filed for Chapter 7. The “best interests of creditors” test is what it’s called.

In many cases, an objection can be resolved prior to the hearing. If the trustee or a creditor claims that the expenses listed in Schedule J are excessive, you can resolve the issue by providing proof of your expenses. Similarly, if a creditor claims you aren’t paying enough, you can settle the dispute by changing your payment schedule to increase the amount you pay.

If the Court Approves Your Plan During Your Hearing

Following confirmation, the trustee will use the monthly payments you send in to pay the creditors listed in your Chapter 13 plan. Making timely and regular payments to the trustee is critical to the success of your case. If you are unable to make your Chapter 13 plan payments, contact the trustee’s office right away. They can assist you in modifying your plan payments.

If Your Plan Isn’t Confirmed by the Court

If the court rejects your proposed plan, the trustee will refund your money, minus any adequate protection payments made to ensure that a secured creditor—usually the holder of your car payment—is not financially harmed during the confirmation process (a bankruptcy requirement).

Learn more about Chapter 13 bankruptcy trustees, including what they do, how they are compensated, and how they manage your repayment plan.

When you file for Chapter 13 bankruptcy, the court will appoint a trustee to manage your case. You’ll learn about the Chapter 13 trustee’s responsibilities, how the trustee is compensated, and the role the trustee will play in your case in this article.

The Chapter 13 Bankruptcy Trustee’s Responsibilities

The trustee’s job in a Chapter 13 bankruptcy is to:

• Make sure your proposed Chapter 13 repayment plan complies with all legal requirements.
• Before you file, make sure you’ve filed your tax returns for the previous four years.
• take advantage of the plan’s payments
• Distribute plan payments to your creditors according to the law.
• keep track of the required monthly income and expense reports in a Chapter 13 case, and
• If you owe back child support, you must provide certain information to the payee and your state’s child support enforcement agency.

How are Chapter 13 Trustees compensated?

Trustees in Chapter 13 keep about 7%–10% of the payments they make to creditors. When deciding whether Chapter 13 is right for you, keep this fee in mind.

The Function of the Chapter 13 Trustee in Your Case

Many Chapter 13 trustees are involved in the cases they oversee. This is particularly true in small suburban or rural judicial districts, as well as in districts with a high number of Chapter 13 bankruptcy cases. A trustee might, for example:

• provide you with financial advice, such as assisting you in the creation of a realistic budget (the trustee cannot, however, give you legal advice)
• assist you in making any necessary changes to your plan
• if you miss a payment or two, give you a temporary reprieve or take other steps to help you get back on track, or
• Participate in any hearing about the value of a piece of property, and consider hiring an appraiser if necessary.
• Your financial relationship with the trustee has its limits, despite the trustee’s interest in your finances.
• You will have control over any money or property you obtain after filing, as long as you follow your repayment plan’s instructions and make all regular payments on your secured debts.

However, if your income or property rises during the course of your plan (for example, if you get a big promotion or win the lottery), the trustee can seek to amend your plan to pay your creditors a higher percentage of what you owe them rather than the lower percentage originally specified. If your income drops and you have to convert from Chapter 13 to Chapter 7, the trustee may become involved.

When you file for Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to oversee the administration of your case. You’ll learn about the specific responsibilities of the Chapter 7 bankruptcy trustee in this article, so you’ll know what to expect before, during, and after the 341 meeting of creditors—the mandatory hearing for almost all filers.

What Does a Chapter 7 Trustee Do?

The Chapter 7 trustee examines the debtor’s bankruptcy paperwork and verifies his or her identification. However, these are minor responsibilities. The Chapter 7 trustee’s primary responsibility is to sell any property that the debtor is not entitled to keep and to distribute the proceeds to the debtor’s creditors. Thus, in any Chapter 7 bankruptcy case, the trustee’s primary interest will be in your personal property and any property you claim as exempt (that you have the right to keep).

Certain individuals believe that the trustee’s role is to assist the debtor throughout the process. The trustee’s role is to protect creditors, not debtors—although the trustee will be courteous and assist the case in moving forward. The best way to grasp this dynamic is to understand how the trustee is compensated. Continue reading.

Payment to the Chapter 7 Trustee

A Chapter 7 trustee is compensated a pittance of $65 per case for performing a cursory review of a debtor’s bankruptcy petition (as of August 2020). A Chapter 7 trustee, on the other hand, stands to earn significantly more. The trustee is compensated by the court a percentage of the funds distributed to the debtor’s creditors.

The funds could come from a variety of nonexempt sources (property that the filer cannot protect with a bankruptcy exemption), including money in the debtor’s bank account, nonexempt property that the trustee liquidates (sells), or funds that the debtor agrees to pay in exchange for the right to keep nonexempt property (more below). The trustee receives 25% of the first $5,000, 10% of the next $50,000, and 5% of any additional funds up to $1,000,000.

The Chapter 7 Trustee conducts an examination of the Bankruptcy Petition.

If all of your property is exempt (you get to keep exempt property), your case is considered a “no-asset” case—creditors will receive nothing. The bankruptcy notice sent to creditors will inform them that they are not required to file proof of claim forms because there will be no money available to pay them. However, they will be informed that this may change.

Under the supervision of the United States Trustee, the trustee is required to review your bankruptcy papers for accuracy and indications of possible fraud or abuse of the bankruptcy system. The trustee will review the documentation and look for indications that you are concealing or mischaracterizing assets. The petition and schedules, as well as the 521 documents you submitted prior to the hearing, will be reviewed (bank statements, paycheck stubs, profit and loss statements, tax returns, and the like).

After discovering nothing, the trustee will lose interest in the case. When the trustee has no property to seize and sell in order to pay your unsecured creditors, there is no commission to motivate the trustee.

The 341 Creditors Meeting Is Conducted by the Chapter 7 Trustee

You’ll meet the Chapter 7 bankruptcy trustee at your creditors’ meeting, which you must attend in order to avoid having your bankruptcy dismissed. The trustee will verify your identification, ask the mandatory 341 questions (along with any other issues raised by your paperwork), and allow any creditors who appear to ask questions (they rarely show up).

Generally, if all of your assets are exempt, the trustee will call the meeting to a close and you will not hear from the trustee again. You’ll complete your debtor education course and await the discharge of your debt.

If, however, you are unable to fully respond to the trustee’s questions, the trustee will postpone the creditors’ meeting and request that you submit appropriate documentation in the interim. Occasionally, the trustee may retain an attorney to pursue nonexempt assets you appear to own, or may refer your case to the United States Trustee’s office for further action if it appears as though you engaged in fraudulent activity.

Nonexempt Assets Are Seized by the Chapter 7 Trustee

If the trustee needs to seize and sell nonexempt assets, you must cooperate in delivering them to the trustee for disposition. Additionally, you can “repurchase” nonexempt assets from the trustee at a negotiated price or substitute exempt assets for nonexempt assets. Numerous trustees discount the property’s value by 20% and occasionally grant the debtor a few months to pay.

Search by the Trustee for Non-Exempt Assets

Many people are unsure whether a trustee has the authority to search their homes to ascertain whether they are concealing property. While such searches are unusual, as part of your obligation to cooperate with the trustee, you may be required to give the trustee a guided tour of your home or storage space. And if you refuse to cooperate, the trustee can obtain a court order compelling you to comply.

Abandonment of Non-Exempt Assets by the Trustee

If you own nonexempt property that is not worth much or would be difficult for the trustee to sell, the trustee can — and frequently will — abandon it, allowing you to keep it. For instance, regardless of how much your used furniture is theoretically worth, many trustees will avoid selling it. Arranging for the sale of used furniture is time consuming and rarely results in a significant profit for the creditors.

The Chapter 7 Trustee Issues Notices of Support Arrears

If you owe back child support, the trustee must notify the support claimant and the state child support agency in order to assist them in locating you following your bankruptcy discharge. Specifically, the trustee will inform the payee of his or her bankruptcy-related rights. The trustee will notify the state child support enforcement agency of the back support, the discharge, the debtor’s address and employer information, and the identity of any creditor holding a nondischargeable, reaffirmed, or a claim.

Both the payee and the child support enforcement agency have the right to request your last known address from these creditors. These creditors are permitted by law to release such information without incurring any penalties.

Learn more about Chapter 13 bankruptcy trustees, including what they do, how they are compensated, and how they manage your repayment plan.

When you file for Chapter 13 bankruptcy, the court will appoint a trustee to manage your case. You’ll learn about the Chapter 13 trustee’s responsibilities, how the trustee is compensated, and the role the trustee will play in your case in this article.

The Chapter 13 Bankruptcy Trustee’s Responsibilities

The trustee’s job in a Chapter 13 bankruptcy is to:

• Make sure your proposed Chapter 13 repayment plan complies with all legal requirements.
• Before you file, make sure you’ve filed your tax returns for the previous four years.
• take advantage of the plan’s payments
• Distribute plan payments to your creditors according to the law.
• keep track of the required monthly income and expense reports in a Chapter 13 case, and
• If you owe back child support, you must provide certain information to the payee and your state’s child support enforcement agency.

How are Chapter 13 Trustees compensated?

Trustees in Chapter 13 keep about 7%–10% of the payments they make to creditors. When deciding whether Chapter 13 is right for you, keep this fee in mind.

The Function of the Chapter 13 Trustee in Your Case

Many Chapter 13 trustees are involved in the cases they oversee. This is particularly true in small suburban or rural judicial districts, as well as in districts with a high number of Chapter 13 bankruptcy cases. A trustee might, for example:

• provide you with financial advice, such as assisting you in the creation of a realistic budget (the trustee cannot, however, give you legal advice)
• assist you in making any necessary changes to your plan
• if you miss a payment or two, give you a temporary reprieve or take other steps to help you get back on track, or
• Participate in any hearing about the value of a piece of property, and consider hiring an appraiser if necessary.
• Your financial relationship with the trustee has its limits, despite the trustee’s interest in your finances.
• You will have control over any money or property you obtain after filing, as long as you follow your repayment plan’s instructions and make all regular payments on your secured debts.

However, if your income or property rises during the course of your plan (for example, if you get a big promotion or win the lottery), the trustee can seek to amend your plan to pay your creditors a higher percentage of what you owe them rather than the lower percentage originally specified. If your income drops and you have to convert from Chapter 13 to Chapter 7, the trustee may become involved.

If you’re attempting to get out from under a mountain of debt, you’re undoubtedly thinking if Chapter 7 or Chapter 13 bankruptcy can help. Your next queries are likely to be how much Chapter 13 will cost and whether it will work for you once you’ve decided it’s the best option for your financial position. We polled readers throughout the country about their recent bankruptcy experiences in order to acquire some real-life answers to these issues. What we gathered from people who filed for Chapter 13 is as follows.

What Are the Fees for Chapter 13 Lawyers?

The law of bankruptcy is complicated and perplexing. Cases involving Chapter 13 can be very complicated, and mistakes might lead to major financial troubles down the road. So it’s no surprise that almost all of our readers (97%) hired a lawyer to assist them with the Chapter 13 bankruptcy procedure. Their legal fees often ranged between $2,500 and $5,000. However, the majority of readers (63 percent) paid $3,000 or less. Nonetheless, the average cost of $3,000 was more than double what other readers spent their lawyers to handle Chapter 7 bankruptcy cases. Because Chapter 13 cases take longer and need more labor, attorneys charge more for them. However, Chapter 13 has a benefit in terms of how attorneys’ fees are normally calculated: While the great majority of bankruptcy lawyers charge a flat fee for their basic services, they usually only require a down payment before filing the Chapter 13 bankruptcy petition. (You’ll also have to pay the filing cost, which is $313 as of December 2020.) The remainder of the attorney’s fee is then included in your Chapter 13 monthly payments, which means it comes out of the money that would otherwise go to your creditors.

When a Chapter 13 Lawyer Might Cost You More or Less

The fees charged by bankruptcy lawyers are determined by numerous factors, including their level of experience and location of practice. Attorneys’ fees, like other expenses, tend to be higher in large urban centers on the coasts. However, in Chapter 13 bankruptcy situations, there is another crucial issue to consider: The amount you pay your attorney must be approved by the court. Many courts set fee standards that they will automatically consider reasonable in order to make the approval process easier (known as “presumptive” or “no look” fees). The rules may also include a list of fundamental services that should be covered, as well as additional costs for business cases and additional services that may be required (such as filing plan modifications or motions). These assumed costs differ from one state to the next, as well as between districts within bigger ones. In a few populated states, examples of the range of presumed costs for essential services include:

• $3,300 to $5,000 in California
• $3,000 to $3,825 in Texas
• $3,500 to $4,500 in Florida
• $2,600 to $3,650 in Michigan
• $4,000 to $5,100 in Virginia

Our findings backed up the conventional assumption that most lawyers will charge that amount or less for basic services in regions where the courts have set guidelines. However, if your case necessitates additional labor, such as when:

• You own a firm as a solo owner.
• Your home is worth less than what you owe, and you want to get rid of your mortgage obligation (or “discharge” it).
• you wish to get rid of your college loans, or
• When you declare for bankruptcy, you become a defendant in a lawsuit.

Source: https://www.nolo.com/legal-encyclopedia/chapter-13-bankruptcy-what-will-it-cost-and-will-it-work.html

If you’re one among the millions of people who lost their jobs as a result of COVID-19, bankruptcy can help you clear your debts while keeping your retirement assets intact. You won’t lose your stimulus cash, though, because the new bankruptcy “recovery rebate” law preserves stimulus checks, tax credits, and child credits.

Exemptions from bankruptcy play an important role in both Chapter 7 and Chapter 13 bankruptcy. Exemptions are used in Chapter 7 bankruptcy to determine how much of your property you get to keep. Exemptions in Chapter 13 bankruptcy help you keep your plan payments modest. Learn more about bankruptcy exemptions and how they work by reading on.

What Are the Different Types of Bankruptcy Exemptions?

Exemptions allow you to keep a specific amount of assets, such as a cheap car, professional tools, clothing, and a retirement account, safe in bankruptcy. You don’t have to worry about the bankruptcy trustee appointed to your case taking an asset and selling it for the benefit of your creditors if you can exclude it.

Many exclusions cover specific property kinds up to a certain dollar value, such as a car or furnishings. An exemption can sometimes protect the asset’s total worth. Some exemptions, known as “wildcard exemptions,” can be used on any of your properties.

Is it okay if I keep my baseball cards? Jewelry? Pets?

The goal of bankruptcy is to give you a fresh start, not to take away all of your possessions. You’ll probably be able to protect other items as well, such as religious literature, a seat in a building of worship, or a burial plot, in addition to the fundamentals. Chickens and feed are even exempt in some states. However, you should not make the mistake of assuming that everything will be well.

• Items of high value. There are no exemptions for boats, collections, pricey artwork, or holiday homes. Instead of filing for bankruptcy, owners with such valuable assets often sell the property and pay off their debts.
• Jewelry. Many states provide protection for wedding rings up to a certain value. Don’t expect to preserve your Rolex, diamond necklace, or antique broach collection, though.
• Pets. The dog or cat you rescued from the shelter is unlikely to fall into the trustee’s hands. Why? It’s not that you’ll have a specific exemption to protect it; rather, the trustee would have to pay more to sell it than it’s worth in most circumstances. However, if you own a valuable show dog or a racehorse with high breeding costs, you may be forced to sell it or pay for it in bankruptcy.

Exemptions: What Are They and How Do They Work?

Whether you’re filing a Chapter 7 or Chapter 13 bankruptcy, exemptions play a significant role.

Bankruptcy under Chapter 7

A liquidation bankruptcy is one in which the appointed trustee sells your nonexempt assets to satisfy your creditors. Because the bankruptcy trustee cannot sell exempt property, exemptions assist you protect your assets in Chapter 7 bankruptcy. If your state offers a $5,000 motor vehicle exemption and you only own one automobile worth $4,000, for example, you can keep it. See Exemptions in Chapter 7 Bankruptcy for more details.

Bankruptcy under Chapter 13

You can keep all of your property and rearrange your debts with a Chapter 13 bankruptcy (which can mean paying less on some of them). The amount you must pay specific creditors, however, is still determined by how much property you can exclude. Unsecured creditors who are not priority (such as credit card companies) must be paid an amount equal to your nonexempt assets. Exemptions assist keep your Chapter 13 bankruptcy plan payments modest by lowering the amount you must pay creditors. See Exemptions in Chapter 13 Bankruptcy for more details.

Bankruptcy Exemptions at the State and Federal Level

There are bankruptcy exemptions in each state. A series of exemptions is also provided by federal law. (See The Federal Bankruptcy Exemptions for further information.) Some states force you to use their exemptions, while others allow you to choose between their exemptions and the federal system (you cannot mix and match the two).

The state exemption rules you’ll be able to use will be determined by where you lived in the previous two years (called the “domicile requirements.”). Read Which Exemptions Can You Use In Bankruptcy? for more information on the distinctions between state and federal exemptions and domicile requirements.

Nonbankruptcy Exemptions in the United States

In addition to state and federal bankruptcy exemptions, there are a number of federal nonbankruptcy exemptions. These exemptions work in a similar way to bankruptcy exemptions in terms of preserving your assets. Nonbankruptcy exemptions from the federal government are only available if you use your state’s exemptions (you cannot combine the federal bankruptcy and nonbankruptcy exemptions). You can use nonbankruptcy exemptions in addition to state exemptions if you are using state exemptions. See The Federal Nonbankruptcy Exemptions for further details.