How Chapter 13 protects assets that would be at risk in chapter 7 bankruptcy
There are many reasons people file chapter 13 bankruptcy in Buffalo and Rochester. Chapter 13 can help resolve mortgage and tax problems. It can also help people eliminate debt when they earn too much to qualify for chapter 7 bankruptcy. This article explains how chapter 13 protects assets that would be at risk in chapter 7.
For people filing any type of bankruptcy in Western New York, the law provides valuable protection for assets. The New York homestead exemption protects up to $85,400 per filer in real estate. This is more than enough to cover the equity that most people have in their real estate over and above their mortgage balance. And for people who do not own real estate, the “wild card” exemption under federal law protects approximately $14,000 in just about anything a client owns. However, there are certainly cases in which the exemptions are not enough.
Let’s look at an example in which a client owns a home worth $150,000 and has a mortgage of $100,000. This client would clearly need the homestead exemption to protect the $50,000 in equity. Now let’s say the client also has two cars worth $5,000 each. The car exemption would protect one of the vehicles, but the second would have no protection. If this client filed a chapter 7 bankruptcy, the trustee would demand that the client turn over the second car or $5,000 in cash to compensate creditors for the value of the car. If the client does not want to give the car up, then chapter 7 is not a viable option. This is where chapter 13 comes in.
In chapter 13, the client never has to turn over any assets. Instead, the client has up to 5 years to pay creditors back an amount that is at least as much as the value of non-exempt assets. So in our example, the client would have five years to pay the $5,000 necessary to protect their second vehicle. If the client has, for example, $25,000 in unsecured debt, they would be paying back 20 cents on the dollar to protect the car. This is what is referred to as the “chapter 7 test” in the case. It means that creditors must always receive in chapter 13 at least as much as they receive in chapter 7.
We tell our clients that we guarantee they will never lose as asset if they file the right type of bankruptcy. This is one of the reason we can make that promise. Any time a client has an asset that might be at risk, we will file a chapter 13 case for them to ensure the protection of that asset.
If you live in the Rochester, Buffalo or Southern Tier region and have concerns about how any assets you own will be treated in a bankruptcy case, please feel free to call or email us.