In a chapter 7 bankruptcy, the court appoints a trustee who has authority to sell the assets of the debtor, and use the proceeds of the sale to pay some of the debtor’s debts. But as a practical matter, in most chapter 7 proceedings, nothing gets sold. That’s because under bankruptcy law, the debtor can “exempt” certain assets. Generally, the exemption law identifies an asset category, and also, specifies a dollar amount for that category. The debtor keeps the assets that fall within the category, so long as debtor’s equity in the assets in a particular category is less than the amount for that category. If the debtor’s equity in assets in the category exceeds the amount of exemption for that category, the trustee usually sells the assets, then pays any liens on the asset, then pays the debtor the amount of exemption. The trustee then disburses the rest of the funds among the creditors.
Understanding and using exemptions is critical to a successful bankruptcy. A skilled attorney must first evaluate debtor’s assets, then select an exemption strategy based on debtor’s future plans.
Let’s look at these two steps.
First, the debtor’s assets must be evaluated. Some assets, such as stocks, bonds, cash-value life insurance policies, and bank accounts are extremely easy to evaluate. Some assets, such as cars and homes, are a little more difficult, and require referring to reliable sources. Some assets, however, require legal analysis .For example, if a debtor has an interest in a trust, or a business, debtor’s attorney must carefully analyze the facts to come up with a fair value. Making a mistake in this analysis can result in debtor losing valuable assets that she could otherwise keep and use.
After evaluating the assets, debtor’s attorney must look at the exemptions, analyze debtor’s long-term plans to choose an exemption scheme.
An exemption scheme must be chosen because California offers debtors two different schemes. At the risk of over-simplification, one scheme provides for a generous exemption in a debtor’s home. The other does not offer any exemption in debtor’s home, but provides for a smaller, but still generous exemption that can be applied to any category of assets – cash, stocks, cars, etc.
Depending upon debtor’s long range plan, an experienced attorney may advise debtor to take advantage of the generous home exemption, or the attorney may advise that debtor use the other exemption scheme to protect cars, businesses, cash, etc.
The exemption analysis does not just apply to chapter 7 cases. Bankruptcy laws require that in a chapter 13, debtors must pay their unsecured creditors an amount equal at least to what they would have received in a chapter 7. Therefore, a skilled bankruptcy attorney must conduct a thorough liquidation and exemption analysis before advising clients about chapter 13 plans.
Sam Taherian has helped over a thousand Northern California consumers wipe out their debts, wipe out second mortgages, or re-organize tax obligations through chapter 7, chapter 11, and chapter 13 bankruptcy. Sam is also a member of the board of directors of the Bay Area Bankruptcy Forum, a non profit organization dedicated to public service.
If you want to have our attorneys evaluate your assets and conduct an in-depth exemption analysis, please contact us today for a free initial consultation.