Retaining Your Assets In Bankruptcy

Exemption Laws

Bankruptcy Estate

The filing of a bankruptcy case creates a "Bankruptcy Estate". The estate consists of all of your assets (everything you own or have a present, future, or contingent equitable or legal interest in) whether tangible or intangible, regardless of the actual location of the property or any encumbrance thereon. A debtor is required to honestly and accurately schedule all of their assets with the Bankruptcy Court. At the same time the bankruptcy case is filed, the Court appoints a bankruptcy trustee.

Trustees Duties

Part of the bankruptcy trustee's duties is to administer the bankruptcy estate. In a chapter 7 case, the trustee reviews the schedules and examines the debtor under oath as to the truth and accuracy thereof. If the trustee identifies property which can be liquidated (we call this "non-exempt property"), it is the trustee's obligation to see that liquidation actually takes place (or in some cases some other arrangements are made) allowing the trustee to pay dividends to creditors in the order of their priority and secured interests.

In a chapter 13 case (repayment plan), part of the trustee's duties is to ensure that creditors receive payments over the life of the plan (usually three to five years) which equal at least as much as they would have received under a chapter 7 liquidation analysis. Additionally, chapter 13 trustees administer the estate by making payments throughout the duration of the plan to scheduled creditors who have had their claims accepted and approved by the Court.

Exemptions

A long, long time ago, all assets were liquidated in bankruptcy proceedings. This resulted in many naked and homeless people who were forced to incur new debt to replace their liquidated assets, and/or become dependent upon the state. The solution? Allow debtors to retain the basic necessities of life. Federal laws went into effect which set forth what property is a necessity worthy of protection (or as we say, "exempted from liquidation").

Partly due to the fact that the cost of living across the United States varies from state to state, several states have opted out of the Federal Exemptions and have decided to implement their own Exemption Laws. California is one such "opt out" state, and actually has two sets of Exemption Laws. These Exemption Laws can be found in the California Code of Civil Procedure under Sections 703 and 704. There are significant differences between the two sets of Exemption Laws, and an experienced attorney will work with you and advise you which set would best serve you in protecting your property.

The following chart sets forth some of the differences between the two sets of Exemption Laws. This is by no means an exhaustive list; it is set forth below merely to illustrate some of the differences between the sets.

California has two sets of exemptions Code of Civil Procedure 703, 704.

Not to Worry!

Actual liquidation of assets in a chapter 7 case rarely takes place. This is due to the fact that most debtors are honest individuals who have made every effort to pay off their just debts. Think about it... if you had $25,000 in credit card debt, and $325,000 equity in your home, it would typically be more prudent to refinance your home and pay off your debt, rather than have a trustee do it for you in a bankruptcy proceeding. After all, trustees make a nice dividend themselves for their efforts, not to mention professional fees involved in the liquidation (trustee's attorneys, their attorneys' accountants, their attorneys' accounts' attorneys, realtors, realtors' attorneys, etc). We have seen extremely inefficient liquidations (not involving our clients) where 90% of the proceeds of a liquidation were depleted on trustee and professional fees, leaving a measly 10% for creditors.

Do not transfer property of the eve of bankruptcy!

One of the worst things a debtor can do is to transfer non-exempt real estate or other property on the eve of filing bankruptcy. Before you even think about such a thing, if you are contemplating filing bankruptcy, you had better consult with an experienced bankruptcy attorney first to become enlightened as to the ramifications of a fraudulent conveyance or preferential transfer! Rest assured that there is hardly anything new that has not already been addressed by the United States Bankruptcy Court.