When you are thinking about filing bankruptcy you might be worried about losing property that is not protected by law. If you have an item that is paid for and worth seizing a bankruptcy trustee will be able to take it and liquidate it for the benefit of your creditors. Our home office is in Kansas, so we will approach things from that perspective in this document.
Liquidation Value in Chapter 7 vs. Chapter 13 Bankruptcies
In Chapter 7 cases the trustee will hire an auctioneer and sell your property and then use the proceeds to pay the unsecured creditors in your case. The amount of money that goes to the creditors out of this process is known as the liquidation value.
If you have property that you want to keep and you need to file a bankruptcy you can keep the property if you file a Chapter 13 bankruptcy and propose to pay the liquidation value through the plan. You can keep the property by paying in the same amount of money that the creditors would have received if you had filed a Chapter 7 bankruptcy.
The liquidation value in a Chapter 13 case is a hypothetical. You are not filing a Chapter 7 bankruptcy case so it is a number that is arrived at based on the experience of the bankruptcy trustee and your attorney. Where they cannot agree on a number the bankruptcy Judge will decide for them.
An Example of Common Assets
As an example let us assume that a married couple with three children files bankruptcy. We will call them Couple A. The children are ages 8, 14, and 18. The couple describes their personal property as follows:
Husband’s daily driver
2018 Ford F150
Secured by bank loan of $15,000
Wife’s daily driver
2014 Toyota Camry
Paid in full – value $10,000
18 year old child’s car
2012 Chevrolet Impala
Paid in full – value $7,000
2008 Polaris 4-wheeler
Household goods and furnishings
Husband’s 401k retirement account
Wife’s state retirement (KPERS)
All of the property above is exempt except for the 2012 Chevrolet Impala, money in the checking and savings accounts, and the 2008 Polaris 4-Wheeler. If they want to keep these items they can pay the liquidation value of these items in order to retain them – including the money in their bank accounts.
Example Assets and Chapter 7 vs. Chapter 13 Bankruptcy
If we look at these items we can see their face value is $7,000+ $2,000+ $1,000+ $500 = $9,500. In a Chapter 7 bankruptcy the trustee would issue a letter telling them to turn over the cash in their accounts and seizing the Chevrolet and the Polaris for auction. For the vehicles there would be a cost of sale which would likely reduce the amount of money realized for the estate by 20%. This would include the cost of an auctioneer and moving the vehicles.
You could deduct $1,400 from the sale of the Chevrolet and $400 from the sale of the Polaris. This means the amount left would be $7,700. From that amount the bankruptcy trustee would be paid a recovery fee based on a formula. They get 25% of the first $5,000 and 10% of the next $2,700. This would lead to a further $1,520 reduction. After the reductions for the cost of sale and the trustees fees there would remain $6,120 that would in theory go to the creditors. That is the liquidation value – the amount that would go to the unsecured creditors.
If you file a Chapter 13 bankruptcy you can keep these unprotected items by paying the liquidation value through the plan. In the example above let’s imagine that Couple A have a car payment on the Ford F150 of $600 and have owned the car for 18 months. They have credit card debt totaling $40,000 debt with payments of $1,200 per month. They have income of $80,000 per year.
If they file a Chapter 13 bankruptcy they could propose a plan as follows:
Attorney – $3,100
Filing Fee – $310
F150 – $15,000
Interest on F150 – $1,562.88 (interest rate currently 4.75% in chapter 13 bankruptcy)
Liquidation Value on non-exempt property – $6,120
Trustee’s Fee – $1,826.50 (this is 7% of all funds paid through the case)
Total to pay in = $27,919.38
After Couple A does a budget with their attorney they think they can make a $550 payment into their plan. This payment now covers the truck payment, all the costs of the bankruptcy, the credit cards and the retention of the property that is not protected by law. In this example the payment is less than their current truck payment outside of bankruptcy.
If you are concerned about property being seized by a bankruptcy trustee you should know there are options to retain things. Before you try to sell or transfer anything away you should contact one of our bankruptcy attorneys and go over your options. In many cases you can easily keep everything you have and still greatly reduce your payments. Please contact us at your convenience and set up a free consultation.