§ 8.14 — Exemption Problems

Revised: April 20, 2016

[1]

Chapter 13 may avoid litigation over the extent of a debtor’s exemptions while permitting the debtor to pay creditors the value of any nonexempt property in the estate over the life of the plan.

[2]

The Chapter 13 debtor must pay unsecured claim holders at least what they would be paid upon liquidation in Chapter 7.1 This hypothetical liquidation test often involves resolution of exemption issues to determine the value of the estate available for creditors in a Chapter 7 case.2 However, the Chapter 13 debtor need not surrender the equity in property to a trustee for immediate distribution to creditors. Instead, the Chapter 13 debtor retains possession and control of all property and may propose to pay the nonexempt value of the estate to unsecured claim holders over the life of the plan.

[3]

Chapter 13 trustees and creditors occasionally litigate exemption questions in a Chapter 13 case, but typically construction of a settlement is easier. The creditors and trustee know that even if they win exemption litigation, the likely outcome is merely a change in the amount they will receive during the life of the plan. If there is an exemption problem in the debtor’s estate, Chapter 13 becomes a vehicle to resolve that problem by payments to creditors over time.

[4]

Chapter 13 debtors have all exemption powers of debtors under other chapters of the Code.3 This includes the power to use 11 U.S.C. § 522(f) to avoid judgment liens and non-purchase-money, nonpossessory security interests in consumer goods if the security interest impairs an exemption to which the debtor would otherwise be entitled.4 Also, a Chapter 13 debtor can use the avoidance powers in 11 U.S.C. § 522(h)(1) to avoid transfers and recover property that can then be exempted under the circumstances described in 11 U.S.C. § 522(g).5

[5]

The new domicile rules6 and exemption limitations added to the Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 20057 somewhat complicate the exemption picture for consumer debtors—adding to the circumstances in which Chapter 13 may be a helpful platform for a debtor with exemption issues.