Exemptions

• Federal exemption laws provide protection for family homes.Jupiterimages/Brand X Pictures/Getty Images
  
  The amount an unsecured creditor recovers depends upon the existence and value of the debtor's nonexempt assets. In bankruptcy, unsecured creditors get paid when the trustee sells the debtor's nonexempt property. When the trustee liquidates the property, she distributes the proceeds among the unsecured creditors. The law labels property that cannot be sold for debt collection as exempt. Federal law enumerates various types of exempt property; however, federal law allows state exemption laws to govern where they exist.
  
  

Unsecured Debt

• There's an old saying that goes, "you can't get blood out of a turnip." The idea underlying this saying explains why unsecured creditors have the most to lose when debtors file for bankruptcy. Quite simply, if the debtor doesn't have it, the unsecured creditor will not get it. For bankruptcy purposes, even creditors who have liens on a debtor's property may be considered unsecured creditors if the debt's amount is greater than the property's value.
  
  

Chapter 13

• Chapter 13 debtors have assets they want to protect.Jupiterimages/Goodshoot/Getty Images
  
  The average cents on the dollar likely improves when the debtor files for Chapter 13 bankruptcy. Unlike Chapter 7 bankruptcy filers, Chapter 13 filers often have assets they want to protect. In Chapter 13 cases, the debtor generally must pay the unsecured creditors at least what he would have received if the debtor filed for Chapter 7. For debtors with valuable nonexempt assets, this can total as much as 100 cents on the dollar. As a general note, the courts call Chapter 13 plans where the filer has no nonexempt assets "zero-percent plans."
  
  

Protection

• Creditors can improve their average recovery amount by becoming secured creditors. Even when a debtor files for bankruptcy, secured creditors can recover the amount the debtor owes them by selling the debtor's property. Unsecured creditors can become secured creditors by obtaining a judgment against the debtor prior to the debtor's bankruptcy. Once the unsecured creditor has a judgment, he can use it to place a judgment lien on the debtor's property. The creditors interest generally will remain protected so long as the attached asset is nonexempt and worth more than the amount owed.