Role of Bankruptcy Exemptions in Chapter 7 & Chapter 13

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Role of Bankruptcy Exemptions in Chapter 7 & Chapter 13

When a person takes a loan from a lender or creditor and is unable to pay back, he can file Bankruptcy in the USA. Filing Bankruptcy allows the debtor some relief in paying the loans. The debtor can file Bankruptcy under Chapter 13 & Chapter 7. While the debtor files bankruptcy he is granted exemptions. The exemptions may vary depending upon the law under which the debtor has filed bankruptcy- chapter 13 or chapter 7.

Chapter 7

Under Chapter 7 the debtor can be relieved or could be asked to clear partial or small amount of unsecured debt. This depends upon the liquid assets the debtor owns. The assets that can be sold to get money are liquid assets. Assets that can generate money and give value are non-exempted assets. Assets that cannot be cashed or brings minimum to no value are exempted assets. Much of the arguments go into what assets should be exempted.

The creditor’s bill is cleared so far as the non-exempted assets can encash and the rest of the debt amount is exempted under Chapter 7. This law is mostly used by debtors with limited means to clear their unsecured debts. The debtor is thoroughly scrutinized before the court gives nod.

Chapter 13

Under chapter 13 the debtor is not completely let off the debt, but his debt amount is broken into small monthly installments. The installments depend upon the liquid assets the debtor has. The value of the liquid assets is evaluated and as per the cashed amount the debt is cut into installment packet to be paid monthly. An amount is fixed by the court to be paid by the debtor. Once he pays it as per the repayment plan, the remaining unsecured loan is discharged.

Bankruptcy exemptions

What are the assets that may come under Bankruptcy Exemptions? The debtor may fear to lose his valuable assets. However, after declaring Bankruptcy you can keep some assets. Under the Bankruptcy law, the debtor can save some of its assets. The debtor may have some assets that may have an emotional attachment to the debtor. An amount is fixed by the court that protects the assets that come under that amount. Such assets may be an old car, furniture, etc.

Wildcard exemption

The debtor who declares bankruptcy under Chapter 7 may in some cases get lucky by a wildcard exemption. This card can help the debtor save his most asset. The wildcard exemption can be applied to any of the non-exempted property of the debtor, which he can save from being sold.

Non-exempted assets

The aim of bankruptcy is to provide a debtor a new beginning free of debts. However, in no form, he can keep products like-

  • Luxury cars/watches/yachts/expensive artwork and many such high-value items that can be exchanged to good money to pay off the unsecured debts.
  • Jewelry can fetch a good deal of cash and hence is not exempted. However, jewellery with sentimental value like wedding/engagement ring under a certain amount can be exempted.
  • Pets like a racehorse or a show dog that can be sold at a great price are non-exempted. However, pets that offer no monetary value come under Bankruptcy Exemptions.

Bankruptcy exemption in State and Federal laws

A state may have a different list of exempted items than Federal law. A debtor must either follow State or Federal law. Some States can be liberal and allow the debtor to choose between the State or Federal law of exemption. However, some states may have a mandatory rule to employ the State rule. The debtor must stay in a state for minimum of 2 years to qualify for the State Law.

Non-Bankruptcy exemptions in Federal law

The Federal law has designed a set of federal exemptions that come under non-bankruptcy law. The debtor can enjoy this benefit and save his assets, as this law works around the similar ground as bankruptcy exemption law.  However, he can only entertain Federal non-bankruptcy law, if he is employing the State’s Bankruptcy exemption law.  In no way, the debtor can entertain both Federal Bankruptcy exemption law and Federal non-bankruptcy law.

The bankruptcy exemption rule is employed to help the debtors lead respectable life after declaring bankruptcy. In no way, the debtor must think of manipulating the law to save his valuable liquid assets and getting through without clearing his unsecured loans.