In Minnesota, owning a boat is a rite of passage. You have probably saved up for years to be able to buy a boat but now a recent financial crisis (i.e. job loss, medical bills, divorce, etc.) has made it difficult to keep up with your bills. You just do not have any money left over each month after paying your necessary living expenses to pay your debts. You are worried that if you file for bankruptcy, you will lose your unnecessary assets such as your boat. You do not need to worry. Many boat owners file for bankruptcy relief and keep their boats they’ve worked so hard for.
Many ask, "Can I keep my boat if I file for bankruptcy?" The answer depends on various factors, including the type of bankruptcy filed, exemptions, equity, and secured loans.
Protecting Assets in a Bankruptcy Filing
A common misconception about bankruptcy is that filing bankruptcy results in a person losing all of his or her assets. While it is true that some debtors may lose an asset, it is not as common as creditors would like debtors to believe. In most bankruptcy cases, the debtor retains all of his or her property except in cases where the debtor voluntarily chooses to surrender an asset to a secured creditor.
When a debtor files bankruptcy, the debtor can claim a particular property “exempt” from creditors and the court. Bankruptcy exemptions protect the equity in the debtor’s assets up to the maximum value allowed by law.
In Minnesota, debtors have the choice between using the federal bankruptcy exemptions or choosing to use state exemptions; however, the debtor has to choose one or the other — the debtor cannot use some federal exemptions and some state exemptions. Neither the federal nor the state exemptions include a specific exemption for boats, which are usually considered non-essential items in bankruptcy.
The federal exemptions do include a wild card exemption that may be used to protect the equity in a boat. Whether a debtor should use the federal or state exemptions depends on the debtor’s specific financial situation.
Understanding Bankruptcy Exemptions and Boat Ownership
If the equity in the boat (the value of the boat less any liens on the boat) exceeds any applicable exemptions, a Chapter 7 bankruptcy trustee could sell the boat and use the funds to pay your creditors. Of course, this depends on the value of the boat. For example, a boat that has mostly sentimental value and very little actual value may not be worth the trouble of liquidating or a boat that has a high lien so that there is little to no equity does not benefit the trustee. However, whether to liquidate a boat that has equity above any exemptions or liens is up to the Chapter 7 trustee.
The implications of retaining a financed boat during bankruptcy must be considered if you have a boat loan. The trustee will evaluate whether the boat loan is reasonable and may object to keeping financed boats if the equity is significant.
Sometimes, the debtor may consider filing a Chapter 13 case to protect the boat. The debtor will pay a slightly higher bankruptcy plan payment but he or she would be able to keep the boat. The Chapter 13 trustee usually does not object to the boat unless the lien payment on the boat is extremely high and the debtor is only proposing to pay a very low percentage to unsecured creditors. Each case is different; therefore, you cannot assume that what happened in another Chapter 13 case will be the same outcome in your Chapter 13 case. The wildcard exemption can be used to protect and keep a boat in Chapter 13 bankruptcy.
How to Determine if Your Assets are Protected or at Risk in a Bankruptcy?
Each bankruptcy case is different; therefore, to determine if your boat is safe or at risk, you must seek the advice of a competent, experienced bankruptcy attorney. The only way to know is to consult an attorney before filing a bankruptcy case. An experienced attorney can give you his or her opinion in addition to the possible outcomes so that you can make an informed decision on whether to file a bankruptcy case.
The homestead exemption is a crucial aspect of bankruptcy exemption laws, particularly under Chapter 7 and Chapter 13 bankruptcy. It helps protect a house's equity. The exemption can also be used to exempt a boat as part of the property, either through specific boat exemptions, the homestead exemption, tools of the trade exemption, or wildcard exemption.
Weighing the Options: Chapter 7 vs. Chapter 13 for Boat Owners
When facing bankruptcy as a boat owner, choosing between Chapter 7 and Chapter 13 can significantly impact your ability to keep your vessel. Chapter 7 focuses on liquidating non-exempt assets, including boats with substantial equity beyond exemptions. In contrast, Chapter 13 allows for a repayment plan, potentially enabling you to keep your boat while catching up on secured debts like boat loans. In Chapter 13, having a small boat loan may make it easier to keep the boat, whereas larger boat loans undergo a stricter evaluation process and can create payment challenges. Careful consideration of your financial situation and long-term goals is crucial when choosing the right path.
Negotiating with the Bankruptcy Trustee: Finding Common Ground
Even if your boat’s equity exceeds exemption limits in a Chapter 7 bankruptcy, all hope may not be lost. You or your attorney can negotiate with the trustee to potentially reach a compromise to pay creditors. This could involve paying the trustee a lump sum representing the non-exempt equity in your boat, allowing you to keep it. Remember, communication and cooperation can often lead to positive outcomes in bankruptcy.
Protecting Other Recreational Assets in Bankruptcy
Boats are not the only recreational assets that might be at risk in bankruptcy. Motorcycles, RVs, ATVs, and other valuable recreational vehicles could also be considered non-exempt. Understanding how exemptions apply to each is vital if you own multiple recreational assets. Strategically choosing between state and federal exemptions and exploring creative solutions with your attorney can help safeguard your recreational lifestyle while addressing your financial challenges.
In a Chapter 13 bankruptcy case, the trustee will review your necessary monthly expenses and may be reluctant to allow you to continue paying for a 'luxury' item such as a boat, which could leave less money for your other unsecured creditors.
If you are facing unmanageable debt but have a boat or other property you would like to protect, speak with an experienced bankruptcy attorney. They will help you determine if your boat is at risk and help you find the best way to protect it and your other assets.
