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Protecting Future Home Equity through Chapter 7

July 8th, 2019 at 7:00 am

Protecting present home equity is a sensible focus when considering bankruptcy. Protecting future potential equity can be even more important. 

 

Our last blog posts discussed how to protect the equity currently in your home through the homestead exemption. We discussed property exemptions in bankruptcy in general, and federal and state homestead exemptions in particular. Overall we showed how your homestead exemption can preserve the equity you presently have through a Chapter 7 case.

We mentioned that you can also protect your future home equity through these same tools, but we didn’t describe how. This is worth more attention.

Future Home Equity

Chapter 7 bankruptcy fixates on the present. It deals with debts you have at the moment your lawyer files the Chapter 7 case at the bankruptcy court. In particular, Chapter 7 usually is not interested in new assets you acquire after the date of filing, For example, the money you earn when you go to work the day after filing is outside bankruptcy jurisdiction. Again, for most purposes bankruptcy looks only at what you own on the date of filing.

This is also true as far as your home is concerned. Chapter 7 fixates on how much equity you have in the home at the moment of filing. That is, we look at what the home is worth then, and how much debt there is against it. (The debt includes all valid security interests against the home: mortgages, property taxes, income tax liens, etc.)

But those factors that determine your home equity—the home’s value, and the amount(s) you owe against it—change. They change all the time. The home’s value goes up and down (but mostly up) with the market. The debt on the security interests change every day with interest and every time you make a payment. Generally after filing bankruptcy and getting your financial house in order, you’d make progress paying down home debts. With the home value usually going up and debt against it going down in the years after filing bankruptcy, most people build equity in their home.  

Future Home Equity Greater than Present Homestead Exemption Amount

There’s a good chance that at some point—if you keep your home long enough—the amount of your home’s equity will exceed the applicable homestead exemption.

Take this example. A home is worth $300,000, the mortgage is $260,000, with a remaining equity being the difference, $40,000. Assume the applicable homestead exemption is $50,000. That covers the $40,000 in equity.

Now let’s say that in 3 years the home value increases to $335,000, and the mortgage is paid down to $250,000. The amount of equity at that point is the difference: $85,000. That’s $35,000 more than the applicable $50,000 homestead exemption (assuming that hasn’t been increased in the meantime).

If this homeowner filed a Chapter 7 bankruptcy now, the $40,000 in present equity is protected by the homestead exemption. But what if the homeowner doesn’t file bankruptcy now but waits 3 years to do so? The home equity will at that point have increased well beyond the amount the homestead exemption would protect.

Future Equity is Even More Important than Protecting Your Home Now

Sure, when you’re considering bankruptcy, your focus is on the present. As far as protecting your home equity, mostly all you want to hear from your bankruptcy lawyer is that the equity is covered now. Is the home equity going to be protected?

But as you think about whether you should file bankruptcy, Chapter 7 or Chapter 13, and when to do so, potential future equity is arguably an even more important consideration.

Most directly, there are simply likely more dollars at stake in future equity vs. present equity. In the above example, the person was protecting $35,000 in home equity when filing bankruptcy now. But by the same bankruptcy filing he or she was protecting $85,000 in future equity. Isn’t protecting that future $85,000 at least as important in protecting the present $35,000 in value?  

Conclusion

When you consider whether to file bankruptcy, you’re thinking about both the present and the future. You want relief and a fresh start now so that you can have a more financially peaceful and prosperous future. When thinking about your home, Chapter 7 allows you to preserve your present modest equity now so that it’ll have the opportunity to build it into much larger future equity.

Protecting Your Home Equity through Chapter 7

July 1st, 2019 at 7:00 am

You can protect the equity in your home if the amount of equity is no more than the homestead exemption applicable to residents of your state. 


 

Our last two blog posts outlined 15 separate ways that bankruptcy can protect your home now and/or in the future. We’ll be explaining each one of these ways in 15 separate blog posts. Here is the first one—protecting present and future equity in your home through Chapter 7 “straight bankruptcy.”

Property Exemptions in General in Bankruptcy

When you file a bankruptcy case, your assets are protected through a set of “exemptions.” “Exemptions” are categories of your assets that are protected for you from your creditors. Each category usually has maximum dollar limits. (See Section 522 on “Exemptions” in the U.S. Bankruptcy Code.)

Exemptions work somewhat differently in Chapter 7 and Chapter 13. Focusing today on Chapter 7, this is a “liquidation” form of bankruptcy. This means in theory that the Chapter 7 trustee takes—liquidates—anything you own not fitting within an exemption. 

However, the practical effect of exemptions is that most people filing under Chapter 7 get to keep everything they own.

The Homestead Exemption

The homestead exemption determines how much equity in your home you can protect from your creditors. As long as the amount of equity is no more than the homestead exemption amount, your home is safe in a Chapter 7 case.

As a quick example, assume your home is worth $300,000, you owe $265,000, so you have equity of $35,000. If the homestead exemption applicable to your state is $35,000 or more, your home is protected.

This means that your Chapter 7 trustee can’t take the home and sell it to pay the equity over to your creditors.

If you have too much equity, you wouldn’t be filing under Chapter 7. Not if you want to keep your home. See next week’s blog post about preserving home equity that’s more than your homestead exemption through Chapter 13.   

Federal vs. State Exemptions

Bankruptcy law provides a set of federal exemptions, while each state has its own set of exemptions as well. All have a homestead exemption. Can you use either the state or federal homestead exemption? If so, which should you use?

At the outset, since bankruptcy is a federal procedure why is state exemption law applicable at all?                                                    

The U.S. Constitution made bankruptcy a federal procedure to make it uniform throughout the country.  See Article I, Section 8, Clause 3 of the Constitution. But there are many areas in bankruptcy where state laws apply. One such broad area is property law. In an interesting compromise, Congress gave each state the power to require its residents to use that state’s set of exemptions instead of the federal ones. Section 522(b)(2) of the Bankruptcy Code.

So 31 states have decided you must use the state law exemptions. In the remaining 19 states you can use either the state or federal bankruptcy exemptions. Since the list is shorter these 19 states that give you a choice are:

Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

The Amount of Your Homestead Exemption

The homestead exemption amounts vary greatly state to state. For example, Kentucky’s homestead exemption protects only $5,000 in value or equity for an individual homeowner. On the opposite extreme, Nevada’s homestead exemption is $550,000. Plus a number of states—including Texas and Florida– have no dollar limit at all (although do have acreage limitations).

This can get quite complicated. For example, Kentucky residents can chose to use the federal homestead exemption instead of the modest state exemption.  But in all states you can’t pick and choose between the various federal and state exemptions. Section 522(b)(1) of the Bankruptcy Code. If you are in a state where you can use the federal homestead exemption, you can’t use any of the state exemptions that might be better for another category of assets. In the example of Nevada and Florida residents, who have such a large or unlimited homestead exemption, if they use that advantageous state homestead exemption they must use their state’s exemptions even if the federal ones may be better in other property categories.

Also, you can’t move to a new state and immediately claim that state’s generous homestead exemption. You must be “domiciled” in your new state for 730 days, or two years. Section 522(b)(3) of the Bankruptcy Code

Finally, your homestead exemption might be limited by a federal cap on the amount you can clam if you bought your home within 1,215 days (3-years and 4 months) before filing bankruptcy. Section 522(p) of the Bankruptcy Code. Effective April 1, 2019 (and for 3 years thereafter), this cap amount is $170,350. This is relevant only if your state homestead exemption is larger than this relatively large amount.

Need Legal Advice

There are other potential complications, depending on your situation. For example, what qualifies as a “homestead” to which you can apply the homestead exemption? What if you’re not on the title but instead buying a home on contract? What about leasehold interests you may have?  What happens if you own the property with your spouse, or with somebody else?

Your homestead exemption situation could well be very straightforward. But it may not be, even when it seems like it is. You need to get legal advice about this. It would be one of the first topics you would cover with your bankruptcy lawyer, and hopefully get reassured about.

Bankruptcy—including Chapter 7—can be a great way to protect present and future equity in your home. But it’s crucial to know for sure which homestead exemption applies to you, and whether it will definitely protect your home.

 

Chapter 7 vs. 13 When Your Vehicle is Worth Too Much

January 19th, 2018 at 8:00 am

Usually your car or truck is protected in bankruptcy with a vehicle exemption. Or if the vehicle is worth too much Chapter 13 can protect it.  

 

How Chapter 7 and Chapter 13 affect your vehicle and vehicle loan can determine which of these options you choose. That’s why we’ve focused the last several blog posts on the differences between these options. We’ve especially looked at reaffirming a vehicle loan in Chapter 7 vs. cramming it down in Chapter 13. Depending on your circumstances one of these is likely a safer and/or less expensive way to keep your vehicle.

But there is another consideration we don’t want to lose sight of. What if you have too much value in your car or truck? What if you either own it free and clear or else it has lots of equity? What if you’re not worried about your lender but rather with the bankruptcy trustee taking your car or truck?

Exemption for Your Vehicle

Why would a bankruptcy trustee be interested taking your vehicle?

Actually, most of the time the trustee wouldn’t be. You are allowed to keep a certain amounts of value or equity in your possessions when filing bankruptcy. These allowances are called “exemptions.” Each state has different exemption amounts for different possession or asset categories. Often their exemption systems are quite different, not just in the amounts protected but also in how they work otherwise. 

With vehicles, often you are allowed a certain exempt dollar amount per vehicle. But in some states there’s a larger catch-all exemption category that your vehicle(s) can fit into along with other assets. Sometimes that catch-all amount changes depending on whether you are exempting your home. The bottom line is usually there’s no problem because your vehicle(s) is (are) fully exempt.

A bankruptcy trustee is only interested in taking your vehicle if it’s worth more than the allowed exempt amount. Or sometimes a vehicle will not qualify for the exemption so it’s not protected at all—such as if you have more than one vehicle.

Vehicle Value or Equity

To be practical, if you owe on your vehicle most likely you don’t have too much equity in it. The part you owe on the vehicle doesn’t count. It’s subtracted from the value. If you owe $10,000 on a vehicle worth $13,500, and you have a $4,000 exemption, you’re fine. Subtract the $10,000 you owe, which leaves $3,500 of equity, which is more than covered by the allowed $4,000 exemption.

Be careful if you are close to paying off your car or truck. You’re then more likely to have too much equity.

Also make sure the debt against your vehicle is a legally valid one. Your creditor must have a “perfected security interest” on your vehicle. This means that it went through all the necessary legal steps to put a legally enforceable lien on your vehicle. Otherwise the debt does not count against the value of your vehicle. That puts it at greater risk that it’s not fully exempt.

Similarly, you need to be careful if the lien was placed on your vehicle too recently. Problems can also arise if the lien was placed too long after you incurred the loan. Under certain such circumstances the bankruptcy trustee can remove a lien from the vehicle. That could mean that the vehicle has more equity than the exemption can protect.

Chapter 7 vs. 13 If Too Much Value or Equity

Whenever your vehicle(s) has (have) too much value or equity, you can protect that otherwise non-exempt portion through Chapter 13. Sometimes you can protect it in a Chapter 7 case, too, but it’s riskier.

Here’s how these work.

Starting with Chapter 7, let’s assume your vehicle is worth $1,500 too much. Say it’s worth $5,500 and the applicable exemption is $4,000, leaving $1,500 unprotected. In a Chapter 7 case the trustee could take that vehicle, sell it, pay you the $4,000 exempt portion and use the remaining $1,500 to pay your creditors. 

But in many situations a Chapter 7 trustee would consider not taking such a vehicle but instead negotiating with you. If you agreed to pay that same $1,500 that the trustee would get, you could keep the vehicle.  You’re saving the trustee the hassle of selling your vehicle while he or she distributes the same amount of money to your creditors. It’s not unusual for trustees to even accept monthly payments. The agreed amount does need to be paid off relatively quickly, usually within several months.

If the unprotected amount is too large for you to pay quickly, then Chapter 13 gives you much more time. Let’s now assume that the vehicle is worth $5,000 too much. Say it’s worth $9,000, the applicable exemption is $4,000, leaving the difference, $5,000, unprotected. (Remember again that your state’s vehicle exemption amount will likely be different.)

You and your bankruptcy lawyer simply have to structure your Chapter 13 plan to pay an extra $5,000 over its 3-to-5-year span. Paying for that unprotected value or equity in your vehicle is spread out over that multi-year period. Also, sometimes you’re not actually paying more than you would have otherwise. That’s if some or all of that $5,000 is going to pay special debts like income taxes that you had to pay anyway.

So, with Chapter 13 you can spread your protection payments over a much longer period of time. And sometimes the extra protection money you pay goes to pay debts you’d have to pay anyway.

 

Chapter 7 or 13? You May Be Surprised

November 15th, 2017 at 8:00 am

Chapter 7 takes about 4 months, while Chapter 13 takes 3 to 5 years, and likely costs more. But that doesn’t begin to answer which is better. 

 

Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” is usually, but not always, for simpler situations. It’s often the right choice if your income is relatively low, your assets are modest, and your debts are straightforward.  You keep all of your assets, all or most of your debts are discharged (legally written off), and if you want you keep paying on your vehicle and/or your mortgage or rent.

Chapter 13 “adjustment of debts” is usually, but not always, better for somewhat more complicated situations. Your income may be too high to qualify for Chapter 7. You may have an asset or two that is not “exempt”—not protected. Or you may have debts much better handled under Chapter 13. Do you owe income taxes or student loans or a second mortgage? Are you behind on a vehicle loan, home mortgage, property tax, or child or spousal support? These and certain other kinds of debts are often handled much better in a Chapter 13 case.

Overall, these two options each have advantages and disadvantages that need to be carefully matched to you and your goals. Chapter 7 may be able to solve immediate problems and do so quickly. Chapter 13 is more expensive but that can be far outweighed by the money you save over using Chapter 7. In some situations the unique tools of Chapter 13 can save a person many thousands of dollars. Chapter 13 takes so much longer but that length can itself be an advantage. When you need or want to pay a special debt, you can stretch payments out to lower their monthly amount. So it just depends on your personal situation.

Be Flexible When You Meet with your Lawyer

You’re reading this blog post, so we’re glad that you’re working on getting informed about your options. But it’s also important to have an open mind when you go to see your bankruptcy lawyer for legal advice. If you do inform yourself in advance you may tentatively decide which option is best for you. Or you may just not know. It is easy to not be aware of a crucial advantage or disadvantage that could be decisive. So don’t be too convinced about going with one option when the other may actually be better.

Sometime Easy, Sometimes Difficult Choice

The reality is that sometimes it’s pretty clear which option is better for you. Sometimes you only qualify for one of the two. Or your circumstances can push your decision strongly towards either Chapter 7 or 13. In these situations, you may have an easy choice.

But often you qualify for both. It’s not unusual that each gives you some advantages and disadvantages that the other doesn’t. Especially in these situations it’s crucial to know all these advantages and disadvantages in order to make the best choice.  Then it comes down to a deeply personal decision based on what goals and benefits are most important to you.

To Help You Be Informed

It IS good to be as informed as you much as your time and energy allows. This choice between Chapter 7 and Chapter 13 is very important. So during the next few weeks we’ll look at the differences between them.

 

Buy Time to Get Current on Home Property Taxes

October 23rd, 2017 at 7:00 am

Falling behind on home’s property taxes creates a special problem. The tax collector will likely be much less pushy than your mortgage lender. 


Falling Behind on Property Taxes

If you have a mortgage on your home you can fall behind on your property taxes two ways.

First, most likely you’re paying your taxes as a portion of what you send monthly to your mortgage lender. When you don’t pay your monthly payment to your lender, you fall behind on both the mortgage and your taxes.

Second, if you’re paying your taxes directly to the county or other tax agency, you fall behind by not paying when it’s due.

The Consequences, Short Term and Long Term

Not paying your property tax results in losing your home through a property tax foreclosure.  But in most parts of the country that doesn’t happen for a number of years past the due date. For quite a while you’ll likely just get occasional notices from the county/tax agency reminding you that you’re late.

It’s not the county/tax agency who’s likely to be making the most noise when you don’t pay your property taxes. It’s your mortgage lender.

Why Your Mortgage Lender Gets Upset

With virtually all mortgage contracts, falling behind on property taxes puts you in default on the mortgage itself. That means that even if you are current on the mortgage payments your lender could foreclose on your home just because you’re behind on the taxes.

The reason for this is that you owing back property taxes is quite dangerous for your lender. If the county/tax agency would foreclose on your home your lender (and other lienholders) would lose its legal rights to your home.  That would leave the lender without any collateral at all on your mortgage loan. It risks getting paid nothing on the loan.

Even if a tax foreclosure would not happen for a few years, not paying property taxes is seen as an indication that you can’t afford the home.  It’s a big warning sign for the lender

To prevent a tax foreclosure from happening your lender will almost certainly pay your past-due property taxes. The mortgage contract allows it to do so. As you can imagine it doesn’t like to put out money like this. So it then aggressively comes after you to pay it back, and quickly. If you don’t pay, your lender will likely start a home foreclosure. That’s especially true if you’ve also fallen behind on your mortgage payments.

If You Can Fix This Fast

If you can catch up quickly on the property taxes you may not need bankruptcy help. But presumably you fell behind because of some serious financial challenges.

Filing a Chapter 7 “straight bankruptcy” case can sometimes provide enough help. But that’s only if your bankruptcy filing improves your cash flow so much that you’d have enough extra money to catch up on the property taxes fast enough to satisfy your lender.

As you work with your bankruptcy lawyer on your budget, he or she will discuss this with you. It’ll likely be a key part of your conversation about whether to file a Chapter 7 or Chapter 13 case.

With Chapter 13 You Buy Lots of Time

If you can’t catch up fast enough to satisfy your mortgage lender, filing a Chapter 13 “adjustment of debts” case requires it to give you more time. In most cases you’d have between 3 and 5 years to catch up on the property taxes.

The first big benefit to you is that this long period of time reduces the monthly catch-up payment amount. Catching up becomes more affordable, making it more likely.

Another benefit is that you’re protected from your lender during this catch-up time. It can’t enforce its requirement that you be current on property taxes. As long as you keep your commitments under the Chapter 13 plan it won’t get permission to take any action against you or your home. The lender is protected because the county/tax agency is itself is prevented from taking any action. It can’t do a tax foreclosure, which benefits both you and your lender.

The third benefit of Chapter 13 is that it solves your property tax problem long term. You won’t fall behind again because your formal budget includes that expense. Plus you’re required to keep current as a condition of your payment plan. Your lender would likely be able to get permission to start a foreclosure if you don’t pay ongoing tax payments. But again, there should be room in your budget to keep current on these.

Then at the end of your Chapter 13 case you would be current on the property taxes. You’d have paid off the original unpaid tax and any accrued interest. Plus you’d have kept current on each new year of taxes because it’ll be in your realistic budget.  Your property tax problem will be resolved.

 

Catching up on Property Taxes on Other Than Your Home

August 14th, 2017 at 7:00 am

If behind on property taxes on property that isn’t your home, either Chapter 7 or Chapter 13 may buy you the time to save this property. 

 

For most people who are behind on property taxes on their real estate, that real estate is their home. And they have a mortgage on that real estate. See our last blog post about catching up on your property taxes on your mortgaged home.

But you may own real estate that isn’t your home, on which you are behind on property taxes. This comes up in a number of scenarios. Today we’ll look at mortgaged investment property on which you’ve fallen behind on property taxes.

First Problem—The Unhappy Mortgage Lender

Again, see our last blog post about why mortgage lenders get very concerned when borrowers fall behind on property taxes. What we said there about mortgaged homes applies as well to investment and other types of real estate.

Briefly, being behind on property taxes is virtually always a breach of your agreement with the mortgage lender. That’s because the property tax is “senior” to the mortgage, meaning a property tax foreclosure would wipe out the mortgage lender’s lien on the property. That’s very dangerous for the lender, so it acts aggressively to get you current on the taxes. This may include the lender paying the tax and then coming after you to pay it back. And if you don’t the lender can start its own foreclosure, even if you’re current on the mortgage itself.

Bankruptcy can solve this problem, one of two ways. A Chapter 7 case “discharges” your other debts so that you can afford to bring your property tax current. And if that doesn’t happen fast enough, a Chapter 13 case buys you more time, up to 5 years. Your court-approved payment plan gives you an affordable, flexible, and protected way to accomplish this.

Second Problem—Justifying Keeping the Property

The bankruptcy system has no trouble helping you pay debts related to your home. Other real estate can get trickier.

If you have investment property, you may need to justify that it’s financially sensible to keep that property. Specifically, you’ll likely have to justify spending money to catch up on the taxes.

For example, is the real estate worth more than you owe on it, including the taxes? If so, that more easily justifies paying the taxes to save your equity in the property.

Also, does the investment real estate generate a positive cash flow? If so, that also more easily justifies paying the taxes to preserve this positive cash flow.

If your investment property has negative equity and/or negative cash flow, it’s hard to justify keeping the property.

Why Does the Bankruptcy System Care?

It cares for budgeting and liquidation purposes.

To go through a Chapter 7 case you must pass the “means test.” That essentially requires showing that you don’t have the means to pay a meaningful amount to your general unsecured creditors. And that in turn usually requires showing a detailed budget. That budget includes a list of allowed expenses. Depending on the circumstances (including the equity/cash flow issues touched on above), you may not be able to include expenses on a financially unnecessary or unjustifiable investment property.

Under Chapter 13 case you pay what you can afford to pay to your creditors through a 3-to-5-year payment plan. As under Chapter 7, you have to justify paying property taxes on a property that isn’t your home. If that property is generating income and helping to pay the other creditors, putting money into that property to pay its taxes is more defensible. If the property is a cash drain justifying putting “good money after bad” into it would be hard to defend.

As for the liquidation issue, in a Chapter 7 case the bankruptcy trustee can liquidate anything that isn’t protected. The protection is mostly in the form of exemptions—property you’re allowed to keep. The Chapter 7 trustee will be inclined to take and liquidate your investment property if it will generate any cash for your other creditors.

Chapter 13 provides a way for you to protect assets you could otherwise lose in a Chapter 7 case. Essentially you pay more into your payment plan to cover the amount of money would have gone to your creditors in a liquidation of your investment property. That may be feasible, depending on your cash flow and on the liquidation value of that property.

Conclusion

Notice that there are some potential Catch-22s when dealing with investment real estate on which you owe property taxes. For example, having equity in the property makes it more prone to liquidation under Chapter 7, but having no equity makes keeping it and curing the taxes harder to justify. Under Chapter 13, a positive cash flow from the investment is important to justify catching up on the taxes. But there’s a good chance you don’t currently have a positive cash flow but rather are just expecting that to happen when certain things fall into place.

So figuring out how to deal with an investment property with owed taxes involves some careful financial and legal judgment calls. This is exactly the kind of situation you need the good counsel of savvy and conscientious bankruptcy lawyer.

 

Example of a Simple Chapter 7 “Asset Case”

June 21st, 2017 at 7:00 am

Chapter 7 “asset” cases may sound scary. They needn’t be. We walk you through a very straightforward example to demystify this.  

 

Asset and No-Asset Chapter 7 Cases

Our last blog post discussed the difference between a no-asset and asset Chapter 7 case. Simply put, in a no-asset case everything you own is covered and protected by available property exemptions. So your trustee takes nothing from you. In contrast, in an asset case, something you own is not covered by a property exemption. So the trustee takes it, sells (“liquidates”) it, and distributes the proceeds to your creditors.

We ended our last blog post with a short example of what happens in an asset case if you happen to owe certain kinds of debt that you’d still have to pay after bankruptcy, such as accrued child support or recent income taxes. The Chapter 7 trustee pays such special “priority” debts in full before paying anything on ordinary debts. That way most of your asset proceeds go to a debt that you have to pay anyway.

But what if you don’t have any such priority debts? What happens in an otherwise simple Chapter 7 case in which you to have an asset that the trustee gets and liquidates?

Our Simple Example

Assume someone named Hannah owes $80,000 in a combination of personal loans, credit cards, and medical bills. Her income qualifies her for a Chapter 7 case under the “means test” in her state with her family size. Under the property exemptions that the law provides to her, everything she owns is exempt except for one thing. She owns, free and clear, a sailboat with a fair market value of $8,000. (Such a boat may be exempt in some states, probably depending on what else she owns, but let’s assume it’s not exempt here.)

Hannah would partly like to keep the boat, because her kids enjoy sailing with her. But it is quite expensive to maintain, draining money she needs for much  more important expenses. So she doesn’t terribly mind losing the boat.

Keeping the Boat

Her bankruptcy lawyer tells Hannah she does have two possible ways to keep the boat. One is under Chapter 7 “straight bankruptcy” and another under Chapter 13 “adjustment of debts.”

She could likely keep the boat by essentially paying for the right to keep it, in a different way with these two options.

Chapter 7 Option for Keeping the Boat

In a Chapter 7 case, if she could come up with around $8,000 she could offer it to the trustee. The trustee would almost certainly accept the money instead of taking the boat. In fact the trustee would likely accept somewhat less because Hannah would be saving the trustee the costs involved in liquidating the boat. The trustee may even allow Hannah to pay off the boat over the course of several months. Then after receiving Hannah’s money, the trustee would distribute it out to her creditors.

Assuming that Hannah doesn’t have ready access to $8,000, either immediately or over the next several months, this is not a very practical option. And even if she could borrow or otherwise raise the money, she’d likely decide that that much effort wasn’t worthwhile. Again, she doesn’t really want the boat anymore.

Chapter 13 Option for Keeping the Boat

Chapter 13 makes hanging onto the boat easier. Hannah would likely have 3 to 5 years to make payments into a Chapter 13 payment plan. Those payments would reflect how much she could afford to pay, and would have to be enough over time to pay at least the $8,000 value of the boat.

So she’d have much more time to pay than under Chapter 7. But she’d be stuck in a bankruptcy case for years, simply to be able to keep something she no longer thinks is wise to keep.

The Best Option Here—the Asset Chapter 7 Case

Hannah decides that simply giving the boat to the Chapter 7 trustee would be the best for her here.

So, with the help of her lawyer she files a Chapter 7 case. A few weeks later she signs over the boat to her assigned trustee. The trustee sells the boat, and after expenses (for the boat broker’s commission, storage fees and such), has a net amount of $7,000.

The trustee is entitled to a fee. It’s generally calculated to be no more than 25% of the first $5,000 distributed, plus 10% of the next $45,000. (See Section 326(a) of the U.S. Bankruptcy Code.) That amounts to a $1,950 fee here, which would come out of the $7,000.

That leaves $5,050 for the creditors. Since Hannah owes no “priority debts,” the $5,050 is divided pro rata among the $80,000 of debts. This means that her creditors would all receive a little more than 6 cents on the dollar.

Although Hannah is losing the boat to her creditors, under her circumstances this is her best option. She gets rid of something that she doesn’t need, finishes her case in a matter of a few months, and gets a fresh financial start by being debt-free.

 

A Chapter 7 “Asset Case”

June 19th, 2017 at 7:00 am

Most Chapter 7 cases are “no-asset” ones. So, what’s an “asset case,” and is it good or bad for you?  

 

The More Common No-Asset Case

The Chapter 7 bankruptcy option is sometimes confusingly called “liquidation” bankruptcy. That implies that something you own gets “liquidated”—sold.  But in most consumer Chapter 7 cases that’s not what happens.

Under Chapter 7 you get a discharge (legal write-off) of most or all of your debts you want to discharged. In return only those things that you own, IF ANY, that do NOT fit within a set of property exemptions must be turned over to your bankruptcy trustee, who then sells them and distributes the proceeds to your creditors.

The reality is that in most Chapter 7 cases everything DOES fit within the set of applicable property exemptions.  So most consumer debtors do NOT turn ANYTHING over to the trustee, and get to keep everything.  Nothing is actually “liquidated.”  Because the trustee takes no assets for distribution to the creditors, this is called a “no asset” case.

Asset Case

So naturally, if you file a Chapter 7 case and own some assets which do NOT fit within the applicable exemption, that’s called an “asset case.” The trustee has assets to take and sell, and distributes their proceeds to creditors.

Reasons Non-Exempt Assets May Not Result in an Asset Case

Just because you have assets that do not fit the applicable property exemptions does not necessarily mean you have an asset case. The trustee is not necessarily obligated to take non-exempt assets, for the following reasons: 

1. The value of the non-exempt assets may be too small to justify the effort. The trustee has to go through quite a few steps in collecting and distributing assets in a Chapter 7 case. If the anticipated amount of collected assets is small, the effort going through all the steps may not be worthwhile.  Talk with your bankruptcy lawyer about what your trustee may consider “too small,” because that varies with different trustees and on your circumstances.

2. The cost and risk involved in collecting or liquidating the asset(s) may not be worthwhile.  You may have an asset in the form of a claim against somebody which may be worth some money. But it may cost a lot in attorney fees to pursue it, and there may not be a positive result.  The trustee may decide that the odds of winning the lawsuit or claim do not justify paying the attorney fees.  

3. An asset can be “burdensome” and not worth collecting for a various practical reasons.  Examples include real estate tainted by hazardous waste, and a pedigree show dog that has a serious temperament problem.

Not Want an “Asset Case”?

Don’t you want to avoid having an “asset case,” avoid having the trustee take something from you?

Sure, in most cases you want to keep everything you own and not have it go to your creditors. But, sometimes you don’t mind giving up something, especially if doing so is the best alternative for you.  

You may not mind giving up an asset if you don’t need it any more. You especially many not mind giving up the asset if the trustee pays the proceeds to creditors you want to be paid anyway.

Paying Your Important Creditor(s) Through Chapter 7 Liquidation

Let’s say you’re a small business owner with leftover business assets after you’ve shut down the business. (Assume these asset are not “tools of your trade” you need for earning your future living). You don’t need or want the business assets. You’d rather give the trustee the headache of divvying them up among the creditors. Surrendering those former business assets to the trustee may well be much better than going through a 3-to-5 year Chapter 13 payment plan just to keep those assets. 

How could the proceeds from those assets possibly go to pay creditors you want to be paid?  This can happen because of the priority rules which determine which debts get paid first. Those priority rules yield results that are often consistent with your own priorities.

For example, the trustee pays any accrued child or spousal support, some tax obligations, and various other categories of “priority” debts in full before paying anything to the conventional “general unsecured” creditors. These special debts are often the ones you want to pay, because they are often not discharged in bankruptcy. So you are simply using the law’s priority rules to your advantage.

Easier Said Than Done

To be clear, things have to fall into place correctly for this to happen. A number of considerations have to be met in order for your assets to flow through a Chapter 7 trustee to the debts you want or need to be paid.

The point is that there are circumstances in which a Chapter 7 “asset case” is not such a bad thing. Indeed it can be your best alternative.

 

When a Chapter 7 Trustee Doesn’t Liquidate Non-Exempt Property

June 14th, 2017 at 7:00 am

Just because you own something that isn’t exempt does not necessarily mean that your Chapter 7 trustee will liquidate it. Maybe not.


Our last blog post was about the most straightforward kind of no asset” Chapter 7 case. That’s when it’s clear that everything you own is “exempt”—fully protected. The property and exemption schedules that you and your bankruptcy lawyer prepare and file at court show this. Your trustee asks a few confirming questions at the “meeting of creditors” and announces that your case is a “no asset” one. That means that there’s nothing you own that the trustee wants to liquidate and pay its proceeds to your creditors.

But if you do own something that isn’t exempt. What happens then?                                     

The Chapter 7 Trustee’s Task

If you have an asset which isn’t exempt from the trustee’s liquidation, he or she doesn’t necessarily liquidate it. According to the Handbook for Chapter 7 Trustees:

The trustee should consider the likelihood that sufficient funds will be generated to make a meaningful distribution to creditors prior to administering a case as an asset case.

In other words, before liquidating anything the trustee needs to decide whether it’s practical to do so. The trustee needs to consider whether enough money would come from the liquidation for a “meaningful distribution” to your creditors.

Considerations about Whether to Liquidate

The following are some of the considerations for the trustee about whether to liquidate an asset of the debtor:

  1. accessibility—is it readily available or not?
  2. liquidation costs—do those costs eat up a substantial amount of the anticipated proceeds?
  3. marketability—is there a risk that the asset cannot be liquidated for a worthwhile price?
  4. burdensome—does the asset have attributes that make is potentially detrimental to the trustee?
  5. “meaningful distribution”—given the number and nature of your debts, will the creditors receive an amount worth the administrative effort involved?

Examples
 
1. Accessibility:

You own a boat that is worth about a $1,000. It was located 1,000 miles away in a remote area on lakeside land that got foreclosed last year. You have not seen it in two years and so are not even sure if it’s still there. Its accessibility is questionable.

2. Liquidation Costs:

Assume that you’ve had a relative verify that this boat is still in the boat shed on the property. But because of the remote and rustic location, the trustee would have to pay a substantial amount to have an agent retrieve, transport, and sell the boat. Those costs could be more than the boat is worth.

3. Marketability:

Under the same facts the boat is not readily marketable at its present location because of its remoteness. The lake is very small, with only very few other landowners who might be interested in buying the boat. There’s no marina or boat broker for a couple hundred miles, with the the nearest local newspaper nearly as far.

4. Burdensome:

The new owner of the foreclosed property does not want the boat and indeed is threatening to charge storage fees. The boat not only has no net liquidation value, it is turning into a burdensome liability.

5. “Meaningful Distribution:

Even if the facts were different so that a trustee believed the boat could net $800 after some relatively modest costs of sale, most likely the trustee would not bother. The trustee is entitled to a 25% fee, or $200 here, leaving only $600 for the creditors. If, for example, you have any “priority” debts (recent income taxes or child/spousal support arrearage), those would be paid first out of that $600 before your other debts would receive anything. Since you’d have to pay these tax/support debts anyway, there’s no practical benefit to going through all the administrative effort of liquidating the boat and distributing the proceeds. The creditors would not receive a “meaningful distribution”—nothing or close to nothing, in this example.

Next

So what happens next, once the trustee decides not to liquidate your otherwise non-exempt asset? We cover that in our next blog post about “abandonment.”

 

A “No Asset” Chapter 7 Case

June 12th, 2017 at 7:00 am

Most individual consumer Chapter 7 cases are “no asset” ones. This means that the Chapter 7 trustee doesn’t liquidate any debtor assets.

 

Chapter 7 Is a Liquidation Form of Bankruptcy

When think “liquidation,” this is what you may come to mind. A business decides to close down and files a Chapter 7 “liquidation” bankruptcy. A bankruptcy trustee gathers and sells all of the business’ assets and pays its creditors as much as it can out of the proceeds.

When you as an individual file under Chapter 7 it’s still a so-called “liquidation” bankruptcy, but it’s usually completely different. Nothing of yours is liquated by your Chapter 7 trustee. The reason is that, unlike a corporation, you are entitled to many property exemptions. These are provisions in the law which protect what you own from your creditors. They protect your property from your Chapter 7 trustee, who acts on behalf of your creditors. Usually everything you own fits within the exemptions that apply to you, protecting everything.

That is called ano asset Chapter 7 case.” The trustee does not liquidate anything.

But in some Chapter 7 cases, everything is not exempt. This is called an “asset Chapter 7 case.”

In this blog post we’ll look at some practical aspects of “no asset” cases.

Anticipating a “No Asset Chapter 7 Case”

After deciding with your bankruptcy lawyer to file under Chapter 7, together you prepare your property and exemption schedules. See Schedule A/B and Schedule C.

In less than half the states, you will have the option of using your state’s property exemptions or a set of federal ones. The federal ones are in the Bankruptcy Code. (See Section 522(d).) In the rest of the states you must use the exemptions provided by the state.

In many situations it will be clear that everything you own fits within the exemptions available to you. Everything fits reasonably neatly into exemption categories. For example, you own a vehicle, and there is an available vehicle exemption. And everything you own is worth no more than the maximum value allowed. For example, your vehicle is worth $4,500 and the exemption maximum is $5,000.  

So your lawyer informs you that based on the information you’ve provided, you should have a “no asset case.” The trustee is not likely to decide that anything you own is not exempt and therefore considering taking and liquidating.

The “Meeting of Creditors”

Then about a month after filing your case, you and your lawyer attend a so-called “meeting of creditors.” Although your creditors are invited, usually none, or maybe only one or two, attend. The meeting is presided over by the assigned Chapter 7 trustee. Usually the main thing that happens is that the trustee verifies that everything you own is exempt and protected. The trustee asks you a few questions under oath verifying the accuracy of what you put on your asset schedules.

Then, depending on the personal practices of the individual trustee, he or she may announce towards the end of the meeting that it’s a “no asset case.” If you do not hear that announcement, your lawyer will likely tell you right after the meeting that that’s effectively the situation. That’s because your schedules show that everything you own is exempt, and the trustee is not asking for further information.

The Trustee’s “No-Asset Report”

Whether or not the trustee announces it at the hearing, if the trustee determines that the case is a no asset case he or she files a “no-asset/no-distribution report.” Here’s a sample of that simple report from the Handbook for Chapter 7 Trustees. At the heart of it is the following statement: “I… report that… I have made a diligent inquiry… and that there is no property available for distribution from the estate over and above that exempted by law.”

 

Next time we’ll get into what happens when things don’t go quite as smoothly as this.

 

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