What Happens To My Non-Exempt Property in Chapter 7 Bankruptcy?Posted May 23 2010 in Wink and Wink by @winkshesaid
Let’s say you are lucky enough to qualify for Chapter 7 bankruptcy. You pass the means test (maybe because of the legal magic of a good bankruptcy lawyer), your debts are dischargeable, you’re ready to file bankruptcy and get free from a load of debt and stress. But you have a problem. You have non-exempt property. Property that doesn’t fit into one of the Colorado Bankruptcy Exemptions. What are your options?
Don’t Do Anything Stupid
Well first let me tell you that it’s going to be OK. Do not panic. The worst thing you can do if you are researching bankruptcy and find that you have non-exempt property, say it’s an old baseball card collection or your inherited silverware set, is to give it away or “sell” it to a family member for pennies on the dollar. Giving property away or selling it for less than market value right before filing bankruptcy is a big No-No. Your bankruptcy petition requires you to list all transfers of property in the two years before you file and all gifts you have given in the year prior. You will sign this petition and be asked under oath if it is accurate. Additionally, every bankruptcy is subject to a random audit and if you are one of the unlucky ones and you lied on your petition, you likely won’t get a discharge and could even be charged with a crime.
It’s Probably Better Than You Think
If I have learned one truth as a bankruptcy attorney it is this: Everyone thinks their stuff is worth more than it is. Everyone. Especially in these tough economic times. For example, there is no market for diamonds right now. They are selling at extremely low prices. If you don’t believe me, check Craigslist. We tell our clients to get an appraisal if they have a piece of jewelry they are worried about losing in bankruptcy. NOT the replacement value the insurance companies use, but the resale value, what a jeweler or pawn shop or someone on Craigslist would actually pay you for the item. Many find that their finer things are worth less than they think and fit into the exemption limit (ex., in Colorado, you can keep $2,000 worth of jewelry).
Other items people are surprised to learn the true value of are their homes (don’t believe what your Realtor neighbor or friend tells you, you need a CMA—comparative market analysis—from someone who knows the realities of the housing market and isn’t selling anything), horses (you can barely give horses away right now) and their household goods.
What are Household Goods and What are they worth?
The definition of Household Goods in Colorado bankruptcy law is found in C.R.S. §13-54-101. Household goods are:
“household furniture, furnishings, dishes, utensils, cutlery, tableware, napery, pictures, prints, appliances, stoves, microwave ovens, beds and bedding, freezers, refrigerators, washing machines, dryers, exercise equipment, musical instruments, bicycles, sewing machines, toys, and home electronics, including but not limited to cameras, television sets, radios, stereos, computers, facsimile machines, telephones, and other audio and video equipment.”
This is a broad definition that reflects the technological world we live in today. It’s actually very generous compared to some states. It covers almost everything most Americans fill their lives with. Additionally, the value to be placed on your household goods is what we call “garage sale value”, and it is far below the price you originally paid for the items. We direct our clients to the Salvation Army website for guidance.
There are two big exceptions to household goods, though, and they can cause some problems in bankruptcy.
The first big exception to the Household Goods definition in Colorado is recreational equipment. Recreational equipment includes camping gear and guns. As you can imagine, this presents an issue for lots of people who need to file bankruptcy. Lots of people have guns, and camping gear, for that matter.
Another exception is for antiques and collections, such as baseball cards. If you have property that falls into this category it can be very hard because it will almost always have sentimental value.
So what do you do if you have non-exempt property, be it guns, antiques or excess equity in your house or car?
Buy It Back or Let It Go (Sometimes it will come back to you)
The first option for non-exempt property in Chapter 7 bankruptcy is to make a deal with your bankruptcy trustee. This happens all the time and is a great reason to use a lawyer when you file bankruptcy. Basically, you are making an offer to buy the property back from the bankruptcy estate (once you file for bankruptcy, all your non-exempt property become property of the bankruptcy estate).
The key to this approach is to have a good, solid value for the things you want to keep such as an appraisal or some other evidence of the market rate for that type of property. Your attorney can help with recommendations for valuing the specific non-exempt items in your case. You do not want to overvalue your stuff, because the trustee is going to use that price if they think it’s high.
If the trustee thinks your value is low, they can order an independent appraisal. That’s where the negotiating part comes into play (and where you breathe a sigh of relief that you have a lawyer to help you, ha ha) with both sides asserting why their price is the one to use, and also how long you will have to pay the final sum. Most trustees will give you three to six months to pay for non-exempt property.
The second option is to let the property go, which does NOT mean let the bankruptcy trustee take it and sell it and give the money to your creditors. Although this is sometimes unavoidable, with good pre-bankruptcy planning it should be very rare. Rather, you should sell the non-exempt property before you file and then use the proceeds to either live off of (buying necessities, not luxury goods) or to purchase exempt property. This approach is accepted by the law, but there are guidelines you must be aware of and a certain amount of risk, especially if we are talking about large amounts of money. If you have non-exempt property and you want to sell it before filing, you must talk to a bankruptcy attorney. It’s essential.
There is one situation where you might not want to sell non-exempt property before filing bankruptcy. That is where you have a small amount of non-exempt property, such as the camping gear in the garage that isn’t worth a lot of money—you want to keep it, but it wouldn’t be the end of the world if you lost it. In this case, you may just want to cross your fingers and see what your trustee does. If there is nothing else in your case for the trustee to take, they will probably let you keep a small amount of non-exempt property. Most trustees will not open a case to distribute assets if the dollar amounts are small (each trustee is different, so there is no way to guarantee this, but most leave anything under a few hundred dollars alone).
In conclusion, having non-exempt property going in to a Chapter 7 bankruptcy is not uncommon. It’s also manageable, especially with good legal advice. If you are in that situation, it’s a great idea to find a bankruptcy attorney who offers free consultations to discuss your options so you can enter your bankruptcy in as strong a position to get a fresh start as possible.