There’s a lot more to using property exemptions than just matching them to your assets. There are benefits worth taking advantage of.
Here are some other important ways that property exemptions work in bankruptcy to protect what you own:
#6. The difference in exemptions under Chapter 7 and Chapter 13:
Your available property exemptions are the same in either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.” But the exemptions are used very differently in each.
Under Chapter 7, the exemptions determine whether you can keep everything you own. Chapter 7 is a “liquidation” form of bankruptcy. The bankruptcy trustee’s job is to determine whether you own anything that can be liquidated on behalf of your creditors. (See Section 704(a) of the U.S. Bankruptcy Code.) Usually you don’t because everything you own is covered by the available exemptions. But that’s why all your assets need to be matched up with exemptions to protect those assets.
Under Chapter 13, your assets are matched up with the available exemptions essentially the same way. The difference is that any of your assets not covered by exemptions are usually not taken from you. Instead the existence and value of any such non-exempt assets usually merely affects how much (if any) you have to pay to your creditors during the life of your Chapter 13 plan. (See Section 1325(a)(4) of the Bankruptcy Code.) In this way Chapter 13 can provide better protection of your assets.
#7. Be thorough in listing assets and exemptions:
Follow the guidance of your bankruptcy lawyer when listing your assets in your bankruptcy documents. Most important: be thorough. When in doubt, talk with your lawyer. (See this sample court Schedule A/B for the form used for this purpose.)
Not including a meaningful asset can jeopardize your whole case.
In extreme cases it can potentially even lead to criminal charges against you by the U.S. Attorney for bankruptcy fraud.
Even in less serious situations, if you don’t include an asset that would have been exempt you would likely lose the right to claim that exemption later. This could result in the trustee taking that asset from you even if it could have been protected earlier.
#8. The Chapter 7 Trustees Have a Lot of Discretion
In most jurisdictions the Chapter 7 trustee assigned to your case will be come from a “panel” of approved trustees. Usually your lawyer has little or no ability to effect which trustee you get.
This may matter because some trustees tend to be more aggressive about claiming your assets than others. The law gives them a fair amount of discretion about this.
Plus, the value of assets can be debatable, especially unusual assets. Examples are a partially restored classic vehicle, shares of stock in an operating but troubled business, or a partial ownership interest in real estate.
So in some cases there can be more uncertainly and unpredictability about how well one’s assets will be protected in a Chapter 7 case.
#9. This discretion can often go in your favor.
The trustee will often not seize an asset even it is likely worth more than the allowed exempt amount. Here are some of the reasons why not:
a) The asset is worth more than the exemption but by an amount not enough to “result in a meaningful distribution to the creditors.” Ask your lawyer what your trustee considers enough extra to justify the trustee’s liquidation efforts.
b) The trustee is unwilling to front the costs of collecting or liquidating an asset. For example, if you own a debt (someone owes you money) your trustee may sensibly decide that paying the court costs and attorney fees to get a judgment against your debtor is not worthwhile if that debtor could not be forced to pay the judgment.
c) The asset may come with risks that outweigh its potential value. The classic example is a parcel of land polluted by hazardous waste. The trustee has a clear right to abandon anything that is “burdensome.” (See Section 554 of the Bankruptcy Code about trustee abandonment.)
#10: Sometimes if can be to your advantage for the trustee take an asset:
Under certain circumstances you may actually want the trustee to take a certain asset or two that are not exempt. Or you may not mind surrendering something that you don’t need in return for the benefit of discharging your debts.
It could be to your advantage for the trustee to liquidate something you’d rather not mess with. For example, if you’ve been struggling to keep a business running, don’t know who should you pay ahead of others, it may be a relief to hand the liquation task over to a bankruptcy trustee.
It could also be to your advantage to have a trustee liquidate an asset if as a result a debt you want paid would be paid. This could happen if you owe a “priority debt,” which the trustee would pay ahead of other debts. “Priority” debts include recent unpaid income taxes and child/spousal support arrearage. Those are debts you would have to pay anyway. And if you operated a business, a priority debt could be a former employee’s unpaid wages, which you may want paid out of a sense of moral obligation.
As these last two blog posts have shown, there’s a lot involved in protecting your assets in a bankruptcy case.