You don’t necessarily need Chapter 13 to protect an exposed asset. The bankruptcy trustee in Chapter 7 is usually willing to do a deal.
Most people filing Chapter 7 “straight bankruptcy” do not have any of their assets at risk. Everything they own is covered by property exemptions, meaning that everything fits within the types and amounts of assets which are protected from their creditors.
But if you do own one or more assets which are not exempt, and which you want to keep, what then?
Chapter 13 can often be a good tool for preserving such assets, especially if there are also other reasons for going that route. We’ll talk about how that works in the next blog post.
But signing up for the three-to-five-year Chapter 13 procedure may be more than you want to do, again especially if there are no other reasons pushing in that direction. Is there any way to keep non-exempt assets by just filing a Chapter 7 case?
Here’s an illustration how that could readily work.
Saving the Sailboat (Motorcycle, Travel Trailer, Other Favorite Asset)
Darrel owns a free and clear sailboat with a fair market value of $3,500, which under the exemptions scheme in his state is completely not exempt—not protected from his creditors, or from a bankruptcy trustee. This boat was given to Darrell by his father four years ago, before he passed away. So it has infinite sentimental value to Darrel. Plus, while he’s owned the sailboat he’s put hundreds and hundreds of hours into refurbishing it. In fact its market value is depressed by the fact that the boat is in the midst of numerous repairs. Once those repairs are completed—Darrel has realistically calculated that would take him another 18 months of dedicated part-time labor–the boat would sensibly be worth about $8,000. At that point he wants to start living in the boat. Doing so would cost him many hundreds of dollars per month less than his current apartment.
So, Darrel has both sentimental and economically viable reasons for trying to keep the sailboat. He has no debts or other circumstances that make Chapter 13 a better option for him, and he is vehement about not being tied into a procedure that would take at least three years to complete.
Pay Off the Chapter 7 Trustee
Darrel’s attorney advises him to file a Chapter 7 case, and then have the attorney negotiate with the bankruptcy trustee to “buy back” the sailboat.
Chapter 7 trustees are liquidating agents. They determine whether debtors have any assets that aren’t exempt, and if so they turn those assets into cash for the creditors. They don’t care where that cash comes from—a purchaser or the debtor himself—as long as the amount is legally appropriate, and it arrives in a reasonable time.
Darrel’s attorney informs him that the trustees on the local “panel” of Chapter 7 trustees are all willing to allow debtors to “buy back” non-exempt assets. Together Darrel and his attorney carefully calculate that if Darrel aggressively but sensibly scrimped on his budget, he would be able and willing to pay a Chapter 7 trustee $350 per month for 10 or so months. Darrel already has an appraisal from a very reputable boat broker indicating a present value of $3,500. His attorney tells him this appraisal will likely carry a lot of weight with the trustees but is not absolute proof of the value, especially considering the mid-repair state of the boat. Darrel is also clearly told by his attorney that if he fails to make whatever payments are agreed upon, he would lose his right to get a discharge of his debts. He says he understands, and he accepts that condition.
Darrel’s Chapter 7 is filed. His attorney negotiates an agreement with the trustee for Darrel to pay 9 payments of $350 monthly, for a total of $3,150, a 10% reduction from the $3,500 value that the trustee agrees is an acceptable fair market value. The reduction is partly to make up for the fact that the trustee will not need to use a boat broker to sell the boat, who would charge 20% of the sale price. The 10% reduction splits the difference, and also reflects the fact that the trustee will have the hassle and risk of getting paid in monthly payments.
Discharge Gained, Boat Paid Off, Mission Accomplished
Darrel begins his $350 monthly payments to the trustee. Then about three months after Darrel’s Chapter 7 case is filed, he receives his Discharge of Debtor, the bankruptcy court order stating that his debts are discharged—legally written off. In most “no-asset” Chapter 7 cases at that point the case would be finished and closed. But here it is kept open for the “liquidation” of the sailboat and distribution of its proceeds to the creditors. Darrel continues making his monthly payments perfectly until he has paid the required 11 payments.
At that point Darrel has succeeded in preserving his sailboat, gotten his discharge of all debts, and avoided tying himself and his finances into much longer Chapter 13 case given that he had no other good reason to do so.