One of the biggest misconceptions about filing for bankruptcy is that you’re going to “lose everything.” A lot of people don’t learn the truth until they’re desperate enough to consult a bankruptcy attorney and learn that in New York, they can use state or federal exemptions to protect property up to a certain value.
How you use your exemptions will depend on whether you are filing for Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 is often referred to as liquidation bankruptcy because you surrender all nonexempt property in exchange for discharge from your debt. Your trustee will take charge of this property, sell it, and distribute the proceeds among your creditors. If you are a corporation, then you cannot use exemptions: all of your business assets are liquidated for the benefit of creditors.
Chapter 13 Bankruptcy
Chapter 13 is known as reorganization bankruptcy. In exchange for holding onto your property, you agree to pay off your debt partially or in full over a three to five-year period. For this reason, Chapter 13 is frequently used to address nondischargeable debts such as child support arrears, back taxes, and student loans.
Courts will approve a Chapter 13 repayment plan if it is sustainable given your current income and leaves your unsecured creditors with more money than they would have received if you filed for Chapter 7. This is what is known as the ‘Best Interests of Creditors’ test.
It is here that exemptions come into play. The amount that your creditors should receive will depend on the value of your nonexempt property. You will have to pay to keep anything that you would have lost if you filed for Chapter 7.
For example, if everything you own is protected by a bankruptcy exemption except for an antique grand piano that’s been in the family for generations, then a Chapter 7 bankruptcy would require you to surrender it to your trustee for sale and distribution. In contrast, you could keep it if you file for Chapter 13, but because the piano is not covered by an exemption, then you would have to pay a monthly fee to your trustee. If the piano was worth $15,000, then you would pay $416 a month (during a three-year repayment plan) or $250 a month (for five years).
Contact a New York bankruptcy attorney
Whether you are better off filing for Chapter 7 or Chapter 13 will depend on your household income, employment stability, and the amount of nonexempt property that you want to protect. A New York bankruptcy attorney will review your circumstances and recommend an outcome that meets your goals as much as possible.
Jayson Lutzky is a Bronx bankruptcy lawyer. If you cannot afford to repay your debts, then bankruptcy might be the right option to help you reclaim your financial independence. Contact Mr. Lutzky’s office at 718-329-9500 to set up a free initial in-person consultation. Visit www.MyNewYorkCityLawyer.com/Bankruptcy to learn more.