In my last blog I wrote about the choices many clients have to face: whether filing a Chapter 7 or Chapter 13 Bankruptcy case is best for them. I discussed that there tends to be “chapter 7 income” and “chapter 13 income” and “chapter 7 debt” and “chapter 13 debt.” Now I would like to discuss the last of the three factors that should be considered in making the decision between chapter 7 and chapter 13 - what kind of assets does the client own, for just as there are income and debt distinctions to make, there are also “chapter 7 assets” and “chapter 13 assets.”
Property In Your Bankruptcy Estate
When a person files a bankruptcy case, there is something called a “bankruptcy estate” created. The bankruptcy estate is composed of all legal and equitable interests a debtor has in property that exists at the time the bankruptcy case is filed. So the assets owned by a debtor at the time the debtor files a case, and the assets that the debtor has a legal right to, even if the debtor is not in possession of the asset at the time the case is filed compose the bankruptcy estate. When a bankruptcy case is filed, whether the filing is a chapter 7 or chapter 13 case, a bankruptcy trustee is appointed to administer the bankruptcy estate.
When a bankruptcy case is filed, your Minneapolis Bankruptcy Attorney will help you list the assets you own, or has a right to, and then exempts the assets to the extent the assets can be exempted. Bankruptcy debtors in Minnesota can choose to exempt the assets that they own by using the United States Bankruptcy Code or they can choose to exempt assets by using Minnesota state laws that govern debtors and creditors.
What The Bankruptcy Trustee Looks For And How they Pursue A Non-exempt Asset
The bankruptcy trustee appointed to the case has an opportunity to review the bankruptcy documents, called “schedules” that the debtor files that detail the assets owned by the debtor and the schedule the debtor has completed that exempts the assets, using the bankruptcy code or state law. The trustee questions debtors at the trustee’s meeting, often about assets that the debtor has listed. The meeting with the trustee takes place approximately four to six weeks after the debtor files his case. The trustee then has 30 days after the meeting with the debtor to object to an exemption if the trustee believes the debtor has exempted an asset that is not exempt under bankruptcy or state law. In many cases debtors who own non-exempt assets concede that fact - and that case is marked as an “asset case” (as opposed to a “no asset case”).
Chapter 7 and chapter 13 trustees have the same job to this point: review the debtor’s schedules to determine if the debtor owns non-exempt assets, and object to exemptions that the trustee believes are not warranted. The chapter 7 and chapter 13 trustees diverge on what happens next. Chapter 7 trustees are liquidating trustees - that is, the chapter 7 trustee has the ability to gain possession of a non-exempt asset, liquidate the value of the asset and then use the proceeds of the liquidation to pay creditors (the trustee receives a commission when creditors are paid). So a chapter 7 trustee has the ability to take property in possession of the debtor and sell it.
Why can the chapter 7 trustee do this? It goes back to the creation of the bankruptcy estate at the time of filing. One of the trade-offs that people with debt problems make when they file a bankruptcy case is that control of the property that they have acquired is no longer in their sole discretion. The bankruptcy trustee has an interest in this property and the debtor simply holds the property in trust for the benefit of the bankruptcy estate.
The chapter 7 trustee and chapter 7 debtors will often work to avoid the physical turnover of an asset and will instead negotiate a payment by the debtor to the trustee to allow the debtor to in essence “buy back” the non-exempt asset from the bankruptcy estate. So clients who own assets that may not be exempt have to know that the chapter 7 trustee has the ability to take away property that the client has worked to acquire, without any payment by the trustee to the debtor.
A chapter 13 trustee is different. A chapter 13 trustee is a non-liquidating trustee. The chapter 13 trustee never takes possession of a debtor’s property, even if that property is not exempt under the terms of the bankruptcy law. Instead, the chapter 13 debtor has to propose a plan that will allow unsecured creditors to do as well in a chapter 13 plan as they would in a chapter 7. So the chapter 13 plan must pay the non-exempt value of any assets owned by the chapter 13 debtor to that debtor’s unsecured creditors and the chapter 13 trustee. So while a chapter 13 trustee has to be paid if there are non-exempt assets, there is no risk to the debtor that a chapter 13 trustee is going to take possession of a non-exempt asset, as there is in a chapter 7 case.
Clients need to understand that because Minnesota allows debtors to use either the federal Bankruptcy Code, or the state debtor-creditor law, most people looking at filing a bankruptcy case do not have non-exempt assets. So most clients can choose the statute that maximizes their ability to protect the assets they own. And if there are not non-exempt assets, then the question of which chapter to file goes back to an analysis of the type of income a debtor earns and the type of debt a debtor has - using chapter 13 to retain non-exempt assets is not a concern in the vast majority of cases.
Keeping Non-Exempt Property When in A Minneapolis Bankruptcy
First, you need to understand that what is measured in terms of exempt or non-exempt property is the clients’s equity in the property - the value of the property minus the value of any unpaid balance in any security interest for which the property is collateral. So a vehicle that is worth $12,000, but has a loan balance against it of $11,000 has $1000 equity, and both Minnesota state law and the Bankruptcy Code allow for an exemption in more than that amount in a motor vehicle. However, a vehicle worth $6000, but that does not have a loan against it has $6000 equity, more than either Minnesota state law or the Bankruptcy Code provide for in the respective motor vehicle exemption laws. So the more valuable car is clearly an exempt asset; the car worth half of that may not be.
So the typical non-exempt asset tends to be an asset with significant equity that is not a “necessity.” Homes, cars, household goods and furnishings and tools used in a person’s work are almost always exempt assets. The right to receive certain payments - such as social security benefits, workers’ compensation, unemployment benefits and child support and maintenance are also typically exempt. But non-necessary property, such as recreational land, recreational vehicles, multiple vehicles, investment accounts, savings accounts, etc. are typically not exempt assets.
The client who has no great attachment to a non-exempt asset, and whose case otherwise fits best as a chapter 7 bankruptcy should file a chapter 7. If retaining an asset is not important, then filing a chapter 7 case will be less expensive for that client compared to filing a chapter 13 case. The chapter 7 bankruptcy case will not take as long as a chapter 13, so the client will receive her discharge more quickly. She can get her “fresh start” with her chapter 7 discharge and move on with her life. A perfect example of the non-critical, unloved non-exempt asset is the leaky, old, fishing boat. A client who is unable to exempt the boat, but for whom the boat no longer holds any utility, really doesn’t gain anything by trying to retain it. So simply because an asset is not exempt does not necessarily mean that a client should be directed to filing a chapter 13 case - instead the question needs to be whether the client wishes to retain the non-exempt asset.
Another factor to consider is what will the chapter 7 trustee be able to do with the non-exempt asset. Chapter 7 trustees liquidate assets. The chapter 7 trustee is not a marketer - the trustee can’t spend money to enhance the value of an asset. So a trustee does not have the financial means to restore a classic car, for instance. The chapter 7 trustee takes the asset “as is” and has to try to find the best way to turn that asset into money. There are some assets for which liquidation is easy. Used vehicles in running order, firearms, some recreational vehicles, well-maintained tools and of course cash or investment accounts all have the ability to be turned into money in fairly short order. Non-exempt real estate is typically not sold quickly, but land certainly can be sold in due course. So non-exempt assets like these are typically attractive to trustees.
Some assets may not be exempt, but are more difficult to liquidate. Specialty equipment, not commonly used, older recreational vehicles or recreational vehicles with mechanical problems, time share interests and real estate remainder interests may not be exempt assets, but there is not a big secondary market for property like this, and thus are not able to be liquidated easily.
A chapter 7 debtor with non-exempt assets always has the ability to attempt to negotiate a settlement of non-exempt assets with the chapter 7 trustee. The debtor and the chapter 7 trustee can arrive at an agreed price to allow the debtor to “buy back” the non-exempt asset from the bankruptcy estate. The price tag for the asset that is easy for the trustee to liquidate will be higher; the price tag for the asset more difficult to liquidate will be lower. Some assets are difficult to liquidate without significant cost to the trustee; for these assets, the trustee has the option of abandonment. The trustee will abandon a non-exempt asset if, in the trustee’s opinion, liquidating the asset is prohibitively expensive. When an asset is abandon, it is returned to the ownership and control of the debtor.
So chapter 7 debtors are well-advised to think carefully about non-exempt assets. Is the asset worth retaining? And if the asset is worth retaining, can the debtor afford to make an agreement with the trustee to buy back the asset from the bankruptcy estate?
For those clients who own non-exempt assets that they would prefer to retain, and that asset is easily liquidated, and/or the asset value is such that buying the asset back from the trustee would be difficult to afford, chapter 13 is a very good option. As mentioned before, a chapter 13 trustee is not a liquidating trustee. So the chapter 13 trustee does not have the ability to liquidate a debtor’s non-exempt asset. Instead, the chapter 13 payment plan must pay enough money to unsecured creditors as they would have received in a chapter 7 liquidation proceeding. Since chapter 13 plans last for a minimum of 36 months, up to a maximum of 60 months, the debtor who owns a valuable non-exempt asset has the ability to pay for the non-exempt asset over a period of up to five years. This feature of chapter 13 makes asset retention much more feasible for a debtor. And debtors should know that it is not just recreational vehicles or time shares that aren’t exempt. The equity of a small business, for instance, may not be exempt and for the individual with debt problems, who derives income from that business, chapter 13 may be the most useful way of resolving debt issues without sacrificing a business that the individual has worked hard to establish.
Besides asset retention, income or debt characterization, there are other reasons individuals might want to file a chapter 13 case. Many people want to pay what they are able to afford on the debt they have - that’s a normal feeling for people with money problems and chapter 13 sets up a structure to do that that an individual can afford. Also, since most chapter 13 cases can be converted to chapter 7 prior to discharge, and if a case is converted, post-filing debt can be included in the chapter 7 case, individuals with financial issues that might incur additional debt - such as individuals with chronic illnesses that might be looking at future medical debt - can find chapter 13 useful if the post-filing debt becomes too much to handle.
The Bottom Line
The bottom line is that the choice between chapter 7 and chapter 13 should be carefully considered, and I strongly believe that a person with money problems should consult with an experienced Minneapolis Bankruptcy Lawyer to weigh the pros and cons of one chapter or the other. With good legal advice, people with financial issues can make a good decision regarding the best way to resolve their financial issues.
For further information contact me at:Kain & Scott, P.A.
100 South Fifth Street #1900
Minneapolis, MN 55402