Will I Lose All Of My Property In A Chapter 13?

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1. Since Creditors Get Paid, You Keep Your Assets

You will not involuntarily lose any of your assets in a Chapter 13 bankruptcy. Why? Because in Chapter 13, you’re paying your creditors through the plan. Since they’re getting paid, you get to keep your possessions. Technically, you don’t pay the creditors directly. Instead, you make the payments to the Chapter 13 Trustee appointed to the case, who takes the funds and pays the creditors according to the terms of the Judge-confirmed plan.

Although you get to keep your assets, we still list, value, and exempt them because the value of the nonexempt assets is the minimum you can get away with repaying your general unsecured creditors over the life of the plan. This is sometimes referred to as the Chapter 7 liquidation requirement for Chapter 13 (also called the best interests of creditors requirement) because the Chapter 13 plan must pay the general unsecured creditors at least as much as they would have gotten in a Chapter 7 liquidation — i.e., the value of the nonexempt assets.

I began this section by stating that you will not involuntarily lose your assets in Chapter 13. However, you can voluntarily lose assets.

For example, suppose you are making payments on a car you no longer want. As part of the bankruptcy you can surrender the car to the creditor. The creditor will then resell the car. If there is a postresale deficiency, the creditor can file a proof of claim for the deficiency amount. If it does, that creditor will be paid at the same percentage as the other general unsecured claims. Unsecured? Yes, because you no longer have the asset that had secured the debt.

As another example, suppose you have been in a Chapter 13 plan for a couple of years, during which your home has greatly increased in value. You may wish to sell the house and pay the plan off early. You must get the Court’s permission to do this using a motion for authority to sell. If the Court grants the motion, the Chapter 13 Trustee will undoubtedly put in a demand on escrow for funds sufficient to pay the creditors in full. Although the case law lacks uniformity on the question, the Chapter 13 Trustees in the Central District of California will insist that you devote enough of the sale proceeds to pay the creditors in full, rather than at whatever reduced percentage you were paying them through the plan.

In sum, you will not lose your assets in a Chapter 13. Moreover, in most Chapter 7 case debtors do not lose their assets. And as in a Chapter 13, in Chapter 11 debtors do not lose possessions unless they propound a plan that involves either a partial or a total liquidation.

2. May I Keep Any Property In A Chapter 13 Without Paying Off The Creditor?

The answer to the question depends on whether the property serves as collateral for the debt to the creditor.

On the one hand, if the debt is unsecured, then the creditor has no claim against any of your property. Therefore, you can keep the asset, regardless of how much you repay that creditor through the Judge-confirmed plan.

On the other hand, if the property serves to secure the debt to the creditor, then if you want to keep the asset, you must repay the debt. This includes paying any prepetition arrearage on the loan. However, there are some exceptions:

A. Bifurcation Of A Partially Secured Debt

If the balance on the debt is greater than the value of the asset, then under certain circumstances you can bifurcate the debt into secured and unsecured portions. The unsecured portion is then paid through the plan at the same percentage as the other general unsecured debts. Important caveat: You cannot bifurcate the debt if it is secured solely by your principal residence, or if it is secured by a car you purchased during the 910-day window immediately prior to filing the bankruptcy petition.

B. Stripping Off A Wholly Unsecured Junior Mortgage

Suppose you have two mortgages against your home. Suppose further that the balance on the first mortgage exceeds the value of the house. (This hasn’t happened in Southern California for quite a while, but a few years ago it happened with some frequency.) Then you can strip off the second mortgage and treat it as a general unsecured debt, to be paid at the same percentage as the other general unsecured debts. If you complete the plan, then that second mortgage ceases to exist, even if you paid a very small percentage through the plan. Note: This relief is not available in Chapter 7.

C. Avoiding A Judgment Lien

Suppose a creditor obtained a judgment against you, and recorded a judgment lien against you home prior to your filing the bankruptcy petition. Then you can avoid the lien to the extent that it impairs your exemption in the property. Successful lien avoidance converts the debt to unsecured status, which is then paid at the same percentage as the other general unsecured debt.

For more information on Chapter 13 Bankruptcy In California, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.