Will I be able to keep all of my assets if I file for chapter 7 bankruptcy? (Part 2)

3 December 2011

As stated in the prior blog posted on 2 November 2011, we are addressing a debtor’s ability to keep his assets upon the filing of a chapter 7 bankruptcy. We stated that once the case is filed, generally your assets become part of the bankruptcy estate and are subject to liquidation. We also stated that once the case is over, whatever asset declared that was not liquidated now is the debtor’s again. So we know the date when uncertainly begins, and we know the date that certainty arrives. But how can a debtor have more assurance while the case is still open? This is the question we address now.

There are only a few options to take. Initially, one must understand that there are exemption statutes that exempt an asset in its entirety, and other exemption statutes that only provide a (maximum) dollar amount. So, one way to increase the certainly you may retain an asset is to claim an exemption in the asset under an exemption statute that exempts the asset in its entirety. There is no magic here because there has to be such a statute that applies to the particular asset.

Another way is to declare an exemption of “100% of FMV” under a statute, even if that statute has a maximum dollar amount. This way, the theory goes, if the trustee or someone else does not object, you are ensured 100% of the value of the asset even if there is a sale of the asset. Some people argue that if these is no objection that the asset itself is fully exempt and it cannot be sold. Either way, you are much more likely to keep the asset. The use of “100% of FMV” gained much attention when it was described, or some would say created, by the United States Supreme Court in its Schwab v. Reilly decision in 2010. 130 S. Ct. 2652, 2668 (2010).

However, the pro se debtor, or even experienced counsel, must beware. There are (presently) great dangers in claiming “100% of FMV.” Some trustees recently seem to be taking the position that it is improper and objecting to it as a matter of course, despite its apparent endorsement by the United States Supreme Court. And the first group of cases that have been decided indicate that the trustees are winning that battle. (That means the debtor is losing.) The war is far from over though, and it is expected by this author and others that this legal conflict will be decided on the circuit level throughout the country within the next few years.

One may think that there may not be much down side to giving it a try and seeing if the trustee objects. Keep in mind that one significant detriment to drawing an objection is that the case remains open longer. This means the closing of the case and the time (of certainty) that a debtor is guaranteed to keep his assets is delayed, which is contrary to the debtor’s initial goal.

In addition to the chance of drawing an objection from the trustee or someone else just on the basis of claiming “100% of FMV,” the propriety of the exemption statute used, its maximum amount in relation to the value of the asset, and the case as a whole, are all given more attention. Although a debtor in bankruptcy pays the price of giving up his privacy and should have nothing to hide, it is still generally not a good move to cause more scrutiny of your exemptions, and your case overall, when in bankruptcy.

So, this raises the question of whether it is worth it to claim “100% of FMV.” The answer to that question can really only be provided by a competent bankruptcy attorney who fully understands the benefits, and if those benefits outweigh the risks, after having had the chance to assess the debtor’s entire financial picture and his goals and desires.

One other option used in this overall topic of keeping assets in bankruptcy will be addressed in yet another post.

If you are contemplating bankruptcy and have an asset that is near and dear to you, or just want to know more about how to keep assets in bankruptcy, feel free to give us a call.

Will I be able to keep all of my assets if I file for chapter 7 bankruptcy?

2 November 2011

The answer is maybe. But in most cases you will not know for sure that you will keep your assets until the case is closed. For a better understanding, please read on.

This question is common for people to have and for bankruptcy blogs to address. Usually the truth is told that it is impossible to give an informed opinion until a thorough financial analysis by a competent bankruptcy attorney is completed. But overall there is an overwhelming tone of confidence in these blogs that convey the message in all likelihood you will be like most debtors and keep everything. “Don’t worry, you’re all set” these blogs seem to say. It is most likely true that in the end you will keep everything, but what will technically/legally occur during the bankruptcy with regard to the debtor’s assets usually escapes most potential debtors. What will really happen sounds scary to the typical person, which is the following.

When you file, everything you have becomes part of the bankruptcy estate, with very few exceptions that may not apply to you. In other words, generally you legally give up your right to the assets when you file for bankruptcy and (almost always) will not retain your full rights until the case is closed. This also means you cannot do what you want with your assets during the bankruptcy. This concept is typically hard for a debtor to digest and understand. The usual way to try and keep your assets is to claim that they are exempt. If they aren’t, the trustee can take them and sell them to pay your creditors (and himself) and give you the amount of your exemption, if you claimed one and it was not disallowed.

Even if you do claim that the entire amount of value of an asset is exempt, the trustee may disagree with your valuation and could get the right to try and sell it. If the trustee is successful in attaining more than what you said was exempt upon sale, again, you will get the amount of any valid exemption you claimed. This is the new law as of March 2010. Schwab v. Reilly, 130 S. Ct. 2652 (2010). There are cases that illustrate this. If you would like to read about a case involving few different debtors where the trustee obtained the right to sell their houses despite the fact the debtors each claimed a valid exemption in the amount of the equity of their homes, you can read Gebhart v. Gaughan. 621 F.3d 1206 (9th Cir. 2010).

There is a way that might ensure that you could keep one hundred percent of the fair market value of your asset ("100% of FMV") while your case is still pending that will be addressed in a future blog. And there is a way one can try and make sure an asset is retained without having to wait until the case is closed. However, as stated, there are no guarantees. The bottom line is, with rare exception, you will not be absolutely sure you will keep your assets until the case is closed.

These facts would tend to scare the typical person contemplating filing for bankruptcy. Should you be scared? No. But you should understand that very little is guaranteed in life, and if you hear an attorney guarantee that you will keep all your assets in a future bankruptcy under chapter 7, find another attorney.

Can I keep my assets if I file for bankruptcy?

15 April 2011

The answer is: most likely, but it depends.

This, and other questions a person that is contemplating bankruptcy may have, are very important because of what is at stake -- your assets (at a minimum). To understand the answer to this question, one must understand what is in (legal) operation during a (chapter 7) bankruptcy.

When someone files for (chapter 7) bankruptcy, what is known as a “bankruptcy estate” is created. 11 U.S.C. § 541(a)(1). Basically, it includes everything a debtor has, with some rare exceptions: Best to think of it as including everything. Since (chapter 7) bankruptcy is a liquidation, assets are subject to forfeiture. The reason that most debtors are able to keep their assets is because of exemptions. Rousey v. Jacoway, 544 U.S. 320 (2005).

Exemptions are laws that protect certain assets, or a certain value of some assets, from collection by creditors. In bankruptcy, exemptions protect these assets (or a certain value of an asset) from liquidation by the chapter 7 trustee. States are allowed to choose to allow a debtor living in their state to have the choice of what set of exemptions, known as an “exemption scheme” in the profession. They can allow a debtor to choose between: 1) bankruptcy exemptions; or 2) state and federal non-bankruptcy exemptions. States may also limit their residents to only #2. Massachusetts and Connecticut are states that allow their residents to choose between #1 and #2.

Having the choice of exemption scheme is a great benefit, but making the choice is one of the most significant decisions one must make when filing. It is a decision an experienced bankruptcy lawyer should make. It can be very tricky (as the other blog posted today illustrates), and when the debtor cares a great deal about their assets, it should be done carefully. Sometimes the titles of the exemptions can be misleading because there is a legal definition associated with it that a person who does research more than simply looking at the title of the exemption will not be aware of. Applying exemptions using common everyday interpretations can be mistaken. Use great care when exempting an asset of significant value or one that has sentimental value. If you want professional help with this choice, and other choices one must make before filing a bankruptcy, feel free to give us a call.