Bankruptcy

My Stuff Is Paid For?Why Do I Have To List It In A Chapter 13 Case?

By Adrian Lapas, Eastern North Carolina Bankruptcy At

This has been addressed previously but the question keeps coming up.  In figuring out a chapter 13 plan payment, there are several “tests” that must be considered.  One test is the “best interests of the creditors” test as set forth under 11 U.S.C. § 1325(a)(4).  Basically, we analyze your case as a chapter 7 case which means that, if you have “stuff” that is “non-exempt,” you must pay for the “non-exempt” value of that “stuff” if you want to keep it.  Or, as Dewey Newcomb said in “Legally Blonde,” “come again?”

If you are a debtor and a creditor sues you and gets a judgment against you, the assets that you own can be sold to pay that creditor.  However, under bankruptcy law (and state collections law), you are allowed to exempt a certain amount of stuff against judgment creditors.  The rationale behind this is that we, as a society, do not wish to leave judgment debtors completely destitute so that we allow them to retain a certain amount of property in order to try to get back on their feet.  In North Carolina, you are allowed to exempt, for example, $35,000.00 in equity in real estate or personal property that you use for your residence; you are allowed to exempt up to $3,500.00 in equity in one motor vehicle; you are allowed to exempt up to $5,000.00 in household goods and up to $5,000.00 in any property (a wildcard) to the extent that you do not fully use your residential real estate exemption.  Other states have different exemption schemes and the federal bankruptcy code also allows for different exemptions, if applicable.

If you have property worth more than you can exempt, and you file a chapter 7 case, the trustee may seek to sell that property.  For example, if you have a car that is worth $15,000.00 and it is paid for (no lien, you have the title), a chapter 7 trustee will want to sell your vehicle.  That is because you can only exempt $3,500.00 under the North Carolina motor vehicle exemption and, if you have a “wildcard” exemption available, you can exempt an additional $5,000.00.  To the trustee, $15,000.00 minus $3,500.00 (exemption) equals CASH to the trustee!  He gets a commission for the sale and will use the proceeds to pay your creditors.  As another example, if you inherit a house from a relative that is the “family homeplace,” a chapter 7 trustee will be thrilled at the prospect of selling the property to pay your creditors. 

Of course, a chapter 7 trustee will be more than happy to take cash and will offer to the debtors that if you pay me cash of, oh $11,000.00 (in the car example which represents the non-exempt equity), I won’t sell your car.   Well, the debtor does not have $11,000.00 in cash (or they wouldn’t be speaking with the bankruptcy lawyer in the first place), so what is the debtor to do with the crushing debt and excess equity in the vehicle that he needs to keep? 

Obviously, since you want to keep the property and having a chapter 7 trustee sell the property is not an enticing proposition, a chapter 13 filing may provide an answer.  A chapter 13 allows you to keep the property but you must pay the value of the non-exempt portion to the chapter 13 trustee for the benefit of your unsecured creditors.  In the above example with the vehicle, $11,000.00 must be allocated to the payment of unsecured creditors for a chapter 13 plan to be confirmed.  That is because the unsecured creditors must receive “the value . . . of property to be distributed under the plan . . . is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chpater 7 . . .”.  If the chapter 13 plan does not propose to pay that amount, then the plan cannot be confirmed as it violates § 1325 of the Bankruptcy Code. 

Remember, as stated above, under state law collections, assets that you own can be seized to pay judgment creditors outside of bankruptcy.  Even (actually, particularly) if the property is “paid for.”  A chapter 13 filing allows to retain property that might otherwise be sold to pay creditors but you do have to pay for the stuff again.

Full post as published by Bankruptcy Law Network on May 26, 2010 (boomark / email).