Crucial Question: How Can I Protect a Non-Exempt Asset with a Chapter 13 “Adjustment of Debts”?
Protect your otherwise unprotected asset(s) by flexibly paying to do so under Chapter 13. Maybe you won’t even need to pay anything extra.
In our last few blog posts we discussed three ways that you can keep something you own in a Chapter 7 “straight bankruptcy” case that is not protected by a property exemption.
Today we’ll cover a fourth and final way such assets could be handled, by keeping them through a Chapter 13 case.
Asset-Saving through Chapter 13 Can Be Much Better Than Under Chapter 7
A Chapter 13 plan is often a tremendously good way to preserve something you own that is not protected by a property exemption. It can be much better than doing so by paying off the Chapter 7 trustee for the following reasons:
- With the Chapter 7 trustee you are at his or her mercy about whether you will be allowed to pay to keep the asset, how much you will have to pay, and how much time you’ll have. Under Chapter 13 you will virtually always be allowed to keep the asset as long as your payment plan meets the rules for doing so. You generally have more say about how much the asset is valued for and thus how much you have to pay. And instead of having at most a year or so to pay for it as in a Chapter 7 case, you’ll have as much as five years under Chapter 13.
- You have more control over which of your special creditors are paid and when. You are not stuck with a completely rigid payment prioritization schedule as is the Chapter 7 trustee. For example, if you owe back payments on a vehicle, a home mortgage arrearage, a recent income tax debt, and back child support, although there are rules you have to follow you do have some discretion about what order, how much per month, and when these debts are paid. That discretion allow you to favor certain debts just enough to make a crucial difference, such as to hold off on paying anything towards an income tax debt for a year or two while you catch up on a more urgent vehicle or mortgage debt, as long as that tax debt is paid off before the completion of your Chapter 13 case.
- In many circumstances protecting a non-exempt asset in a Chapter 13 case actually costs you NO MORE than if you weren’t protecting that asset. How could that be if you generally have to pay extra in a Chapter 13 case to save an asset that is non-exempt? Actually, the law says in a Chapter 13 case you have to pay to your “general unsecured” debts at least as much as they would have received in a liquidating Chapter 7 case. But if all of the extra money you must pay to protect the non-exempt asset would have gone in that hypothetical Chapter 7 case to pay “priority debts” (such as back child and/or spousal support and recent income taxes), and nothing would have filtered down to the “general unsecured” creditors, then in your Chapter 13 case you would usually also not need to pay anything to the “general unsecured” debts either. You get the benefits of Chapter 13 without having to pay anything more on your debts.
Most people filing Chapter 7 only own assets that are exempt, or the non-exempt asset is not worth the trustee’s efforts to collect and liquidate. But if you do have a non-exempt asset that the trustee would want, consider surrender it to the trustee, especially if the proceeds will go to pay a creditor that you want to be paid. But if you do want to keep the asset, you can either pay off the Chapter 7 trustee, often through monthly payments, or by going through a Chapter 13 case instead. As we have just seen, Chapter 13 is usually more flexible and powerful, often making it the best option for preserving any assets that are not exempt.