Of all of the questions I am asked from potential clients, the most common question is whether the debtor can keep their car and their home.
Fortunately in most cases the answer is yes. For most people the thought of bankruptcy invokes fear. Fear of losing everything, like on Wheel of Fortune. In a typical case, most debtors can keep their assets and receive a discharge.
When a car or home has little or no equity, and the payments to the lender are current, a debtor can opt to continue paying for the car and the house, and keep the assets. In some instances a debtor may be asked to sign a re-affirmation agreement with the lender in order to keep a vehicle (this is a topic for a different discussion), but the option to keep the asset is always available
When a car or home has some equity, there are exemptions available, to protect the equity for the debtor. In Colorado a debtor can claim up to $60,000 of equity in their home as exempt ($90,000 if the debtor is over 60 or disabled). A debtor in Colorado can claim up to $5,000 of equity in their vehicles as exempt ($10,000 for a married couple filing jointly, and $10,000 each for debtors over 60 or disabled).
When a car or home has equity in excess of the exemptions available the situation gets a little more complicated, however, it is not always impossible to protect such assets in such situations. In cases where the assets have more substantial equity than the exemptions allow, a debtor should definitely discuss the matter with a knowledgeable attorney and determine the best route for protecting assets. Some options that I suggest for clients include 1) filing a chapter 13 bankruptcy
instead of a chapter 7 bankruptcy; 2) being prepared to "buy back" from the chapter 7 trustee most or all of the non-exempt asset; or 3) liquidating the asset and using the proceeds for necessary living expenses prior to filing of the case.
A chapter 13 bankruptcy allows debtors to keep their non-exempt assets as long as their unsecured creditors receive at least the equivalent of what they would have received if those assets were liquidated in a chapter 7. For example a debtor who owns, free and clear, a home with a fair market value of $100,000 has $40,000 of non-exempt equity in their home. Generally if a chapter 7 was filed
, the trustee would liquidate the property, incur cost of sale, realtor's fees, and his own administrative costs. Assuming the Realtors fees and cost of sale are roughly 10% of the sale price ($10,000), the trustee would have about $30,000 to for creditors, the administrative fees the trustee is entitled to can then also be subtracted, leaving about $26,000 for the creditors. The debtor would have to pay at least that amount for unsecured creditors, into a chapter 13 plan, but would have up to five years to pay. (Please note that this is a simplification of the process because there can be other things that could affect the amount that unsecured creditors may receive in a chapter 13, like back taxes or child support arrears).
In many cases, where an asset exceeds the exemption allowed
, but by a lesser amount, the asset, or its non-exempt portion, can be "bought back" from the trustee in a chapter 7. For example a debtor who owns a free and clear vehicle with a fair market value of $7,000.00 has $2,000 worth of non-exempt equity. The trustee may declare "I'm going to sell your car" but if your attorney is sitting beside you, and you are aware of your rights, your attorney may indicate that you wish to settle with the trustee. The trustee may agree to take slightly less than the $2,000 to avoid all the formalities and costs of selling the vehicle, however the trustee may also agree to a short payment plan and for that he/she may not be willing to negotiate too far from the actual stated value. In such cases, a debtor should be prepared to pay the values or turnover other, less significant, non-exempt assets, such as guns, recreation equipment, and cash on hand and in the bank at the time of filing, because the case is now considered an asset case and the trustee will be administering the case. (Many trustees will not administer a case for one small non-exempt asset such as a $50 gun, but when there is $2000 from a car, or money from a tax refund, the trustees will typically add in all other non-exempt assets).
Liquidating the asset for ones own benefit is also an option. Of course if this is what you decide to do, you will need to do this prior
to filing your bankruptcy. When a debtor believes that they really need a car but cannot fathom paying even a cent, perhaps because they are out of work, or they are barely scraping by, selling a vehicle and using the proceeds to purchase a different vehicle, making sure that the equity in the new vehicle is equal to or less than the allowed exemption. A debtor can then use the remaining proceeds to help with other day to day expenses, pay for necessary repairs to their home or vehicles, and/or pay the filing fee or attorney's fees for their bankruptcy. In some cases, a debtor may wish to use a portion of the proceeds toward a newer, more reliable car and may choose to finance (when available, and often is) the remaining costs of the newer vehicle. Again it is important to ensure that the equity is equal or less than the allowed exemption.
It is also important to remember that selling an asset for less than fair market value or simply changing title to any asset, by transferring to a friend or family member is not valid and will not protect the asset. The transfer of an asset for less than fair market value in the two years (can be up to four years) prior to filing bankruptcy can be avoided by the trustee in the bankruptcy. Not only will you lose the asset entirely, you will not be able to claim your exemption on the asset either
If you have been considering bankruptcy, and just want some answers to the questions floating around your head, we offer a free consultation with one of the two very knowledgeable attorneys at Greenwald & Hammond
. Please call 303-731-4234 today to set an appointment.
Mindy Greenwald, Esq