Portland Bankruptcy Law Group

You may have heard that assets that you might lose in a Chapter 7 case can be protected in a Chapter 13 case.  Is that always true?  Is that a good way to keep an asset you really want to hang on to? How does this work?

Bankruptcy law is essentially a delicate balancing act between the rights of people who owe debts and the creditors to whom those debts are owed.  A very basic part of that balancing of rights is the principle that the people who owe the debts get those debts written off, or legally “discharged,” in return for giving the creditors any assets they own beyond what is needed for survival.  There is a rather rigid set of rules which determines what assets the debtors get to keep—“exempt” ones—and what they have to surrender to their creditors.

A Chapter 7 case is also called “liquidation.”  The Chapter 7 trustee, on behalf of all your creditors, looks over your bankruptcy documents, asks you some questions about them, and determines whether there is anything you own that is not “exempt.”  Most individuals who file Chapter 7 bankruptcy own only exempt assets.  So the trustee—and the creditors—get nothing from them.  A person who does own assets that were not exempt would not be filing a Chapter 7 case, unless they were willing to surrender those non-exempt assets in return for getting the debts discharged.

So if you did have a non-exempt asset that you really needed to keep, you would not file a Chapter 7 case.  Say you owned a free and clear vehicle worth $10,000, well over the $3,000 vehicle exemption, and you needed it to get to work—Could Chapter 13 protect it, and do so in a virtually guaranteed way?

Assuming you are single, after the $3,000 vehicle exemption allowed to a single person, that leaves $7,000 not exempt.  You would be able to keep your vehicle in a Chapter 13 case if your three-to-five-year payment Plan distributed at least $7,000 to your “general unsecured” creditors, in addition to meeting all the other requirements of Chapter 13.  The “general unsecured” creditors are those which 1) are not secured by collateral like vehicles or real estate, and 2) do not get favored treatment as a “priority” creditor like many taxes.

If you think about it, the Chapter 13 accomplishes for the creditors what a Chapter 7 does: getting them the $7,000 in non-exempt value of the vehicle.  But in a Chapter 13 case this happens over the course of years through payments instead of months through the Chapter 7 trustee taking the vehicle, selling it, and paying the proceeds beyond the exempt amount—about $7,000—to the creditors.

Is Chapter 13 a guaranteed way to be able to keep this vehicle?  There can be debates around the edges that would affect exactly how your Chapter 13 would look, issues like how much the vehicle is actually worth to determine how much you have to pay into the Plan.  And you have to successfully complete that three-to-five-year Plan, during which time a lot can happen.  Perhaps most important, Chapter 13 should fit the rest of your financial circumstances.

But, if it does, Chapter 13 can be a pretty reliable way to keep for yourself what you would otherwise have to give to your creditors if you filed a Chapter 7 case.

In our last blog we told you that the Oregon Legislature had just passed an increase in the “tools of trade” exemption from $3,000 to $5,000.  We showed a number of ways this increase has a bigger impact than it sounds.  In the case of a business-owning husband and wife, each person is given his and her own exemption, which they can combine. So with this increase their combined exemption in effect increased to $10,000.  Considering that assets in bankruptcy are generally valued based on what they could be sold for in their present condition, $10,000 would cover a quite lot of business assets.

Not all exemptions in Oregon can be doubled like this for a husband and wife filing bankruptcy together.  For example, the “household goods, furniture” exemption is fixed at $3,000, regardless whether you’re a single person filing a bankruptcy or a married couple doing so.

So what ARE the exemptions that are doubled when a husband and wife file a bankruptcy together?  Besides tools of trade, other doubling exemptions include “books, pictures & musical instruments” ($600 per person), “wearing apparel, jewelry and other personal items” ($1,800 per person), a “motor vehicle” ($3,000 per person), and a general personal property exemption mostly used for cash on hand and money in bank accounts ($400 per person).

We’ll use the vehicle exemption to show different scenarios how this can help in a Chapter 7 case:

1. Husband and wife filing a joint bankruptcy, each own a modest vehicle free and clear:

Each can claim their own $3,000 exemption on each of their vehicles.  As long as each vehicle is worth $3,000 or less, they will be able to keep both.

2. Husband and wife filing a joint bankruptcy, each own a vehicle with debt against it but each one is worth more than the debt on that vehicle:

Each can claim their own $3,000 exemption on each of their vehicles.  As long as the amount of equity in each vehicle is $3,000 or less, and they keep up their payments to their vehicle lenders, they can keep both vehicles.

3. Husband and wife filing a joint bankruptcy, jointly own two vehicles, one free and clear and the other with more debt against it than it is worth:

Each can apply their $3,000 exemption on the one free and clear vehicle, doubling up on it, since the other vehicle has no equity that needs to be protected.  As long as the amount of equity in the free and clear vehicle is $6,000 or less, they can keep that vehicle.  They can keep the other one as well if they want to keep up the payments, or can chose to surrender it and owe nothing more on it.

4. Only ONE spouse files a bankruptcy, and they together own only one vehicle, free and clear:

Since the filing spouse owns only half of their single vehicle (assuming they both contributed to its purchase and upkeep, directly or indirectly), that spouse can claim her $3,000 exemption on that half of their vehicle. So that vehicle is effectively protected up to the value of $6,000.