In prior posts, I explained how the bankruptcy exemptions can be used to protect assets and how they periodically get updated. While New Yorkers can choose between state and federal exemptions to protect assets, sometimes people find themselves with assets that cannot be fully protected or can only be partially protected. This post will explain what that means and the practical implications.
Bankruptcy is a tool used to help eliminate debt. However, one cannot reasonably expect to protect the Porsche, a paid off mansion, etc. There are limits to what we can protect in bankruptcy. The types of property that can be protected are limited and there are protection limits. For real property, the exemption is limited to a primary residence and is capped. Personal injury suits are only protected up to an exemption limit ($25,215 under the federal exemption or $9,000 using the New York State exemption). You may also use a wildcard exemption, if available, to supplement the exemption offered in a specific category (except real property) to increase the protection limits.
Most Chapter 7 bankruptcy cases are considered “no asset” cases in that all a debtor’s property is protected and there are no assets for a bankruptcy trustee to distribute. However, sometimes a debtor will have assets. Depending on the type of asset and unprotected value, a trustee may take interest. He or she will not start selling assets of minimal value so 20 creditors can receive $1.78. It has to be worth a trustee’s time and provide something more substantial to creditors.
What types of assets does a trustee look for?
In short, anything with value. Unprotected money in the bank, homes or vehicles with values exceeding exemption limits, personal injury cases worth more than the exemption limit, and unprotected tax refunds are the most common types of assets. Generally speaking, unprotected assets worth less than $2,000 are safe, unless there are several where the value adds up to a substantial amount. If a personal injury case may be worth a few thousand more than the exemption limit and the case is years away from settling, a trustee just may abandon that asset as well. Once we’re talking about an asset worth more than $5,000 a trustee will almost certainly take interest.
Assets are especially relevant now, as used car values have increased significantly over the past year. They are now attractive targets for trustees whereas in the past, lower values and some minor (or major) dings in the car left little unprotected. Increased home values are also a target and trustees may seek appraisals if the equity (value less any mortgages) is close to the limit. At the same time, with bankruptcy filings still on the decline, trustees have more time to put towards reviewing assets and may be hungrier for assets to sell.
What is worth a trustee’s time?
Any time a bankruptcy trustee has an asset to administer, there are required court filings before and reports to file afterwards. This takes time and the trustee’s do not work for free. They too will bill for their time. The trustees receive a percentage of all assets they administer and may also seek compensation for their time and work. The funds come from the assets themselves, not a separate fee paid by the debtor. In short, the unprotected asset (or unprotected value of an asset) must have enough value to compensate trustees for their time while offering a meaningful distribution to creditors. Note that what constitutes a meaningful distribution varies by case.
Will a trustee immediately start selling a debtor’s assets?
Not exactly. A trustee would rather not have to sell property. When a trustee sells property, it’s usually through an auctioneer or other third-party. That third-party must also be compensated, leaving less to distribute to creditors. A trustee will typically offer a debtor an opportunity to pay the unprotected value in installments instead.
For instance if you have $5,000 of unprotected equity in your vehicle, a trustee may give you a chance to pay that value over six to twelve months and may discount the $5,000 (with good negotiating). A trustee will not demand the keys at your meeting of creditors. The same goes with a house. If your primary residence has significant equity or you have a second home with equity that cannot be protected, expect to play “let’s make a deal” with the trustee.
Are there other options?
Yes. Rather than working out a payment plan with a trustee, you can turn over an asset to the trustee. That puts the burden on the trustee to get an offer that provides funds to the creditors and compensates the trustee as well. If a portion of that asset was exempt, the trustee will pay the debtor the exempt amount first, before any other distributions.
Another option is to explore Chapter 13 relief rather than Chapter 7. This determination should be made before a case is filed. In a Chapter 13, you may only have to pay back pennies on the dollar and payments are spread over a period of 36 to 60 months. The plan may be dictated by a liquidation analysis, in that you are paying the total of all unprotected assets over the life of the repayment plan.
An experienced bankruptcy attorney should be able to identify any assets that may not be protected before a case is filed so the debtor can decide if it still makes sense to seek Chapter 7 relief, consider Chapter 13 relief, or not file for bankruptcy relief at all. Matthew D. Zimmelman, Esq. has over ten years of bankruptcy experience and has negotiated many favorable settlements with bankruptcy trustees. Don’t put your assets at risk, contact Zimmelman Law PLLC.
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