Oftentimes, when discussing assets with my clients, I am interrupted by my client with something along the lines of…
“I don’t have any assets.”
Yes, you do.
Everyone has assets. Some people have much more in assets than other people do. But unless you’re living a truly nomadic lifestyle in a nudist colony (in which case, you’re probably not consulting a bankruptcy attorney) – you have some assets.
Here are a few very important things to remember…
- The term “assets” is an extremely broad term that covers a lot of stuff.
- Just because an asset has an extremely low value doesn’t mean it’s not an asset. Nor does it mean that its existence doesn’t have to be disclosed as an asset.
- Just because you disclose an asset on your bankruptcy schedules doesn’t mean you’re going to lose an asset.
- Whether someone has assets or not is a different question from whether someone has positive net worth (the value of assets exceeding one’s debts) or negative net worth (the value of assets worth less than the person’s liabilities).
Let’s focus on the first and second points. How I know that every client of mine has at least some assets is that in my career, I have never met a completely naked client. At the very least – someone who owns little else is going to own the shirt on his back.
Many people erroneously believe that the term “asset” refers to real estate and motor vehicles. Indeed, real estate and motor vehicles are the two most common assets people may own of substantial value. Moreoever, these are the two most common assets that are associated with formal ownership documentation (by way of deeds and titles).
Ironically, you may hold more equity in your household goods (which seldom are subject to liens) than your home or vehicle (the value of which may be wholly encumbered by a mortgage or auto loan). Which brings us to another point…
Just because a bank holds a note against your home or car, it does not mean that you don’t own your home or car. You do own them; and you have the rights and responsibilities to those assets as any other owner does, as compared to someone else who may lease or own his home or car. A lien merely provides a legal remedy to the holder of a debt to take ownership away from you in the event of a default.
Household items (things like furniture, appliances, clothing, etc.) tend to be the lowest-valued assets that people commonly own. As with vehicles, the value of household items depreciates dramatically the moment it leaves the store you bought it from – as anyone who has ever tried to make a fortune at a rummage sale can tell you. That being said – not all household items are of low value. Certain assets may appreciate with age – such an antiques, collectibles, firearms, and jewelry. On the opposite end of the spectrum, even the pens, staplers, and this thumbtack sitting on my desk, the groceries in my kitchen, and the cleaning supplies in my linen closet are assets (though nobody in their right mind would go through the trouble of itemizing them all – this is where a broad category of “all other miscellaneous stuff” comes in handy on the bankruptcy schedules.
Pets are an asset. Again, usually not a very valuable asset, and not an asset that any trustee would ever take an interest in. But they are an asset and must be disclosed. Sentimental value is irrelevant in bankruptcy. As with all of your assets, what we are concerned with is a simple question:
If the trustee hypothetically sold this asset to a third party – how much could the trustee sell it for?
It doesn’t mean that the trustee will sell an asset, but this is the hypothetical we use to determine what your stuff is worth.
Bank accounts, retirement accounts, life insurance policies with a cash value, stocks, bonds, and actual cash and coin are all examples of “liquid assets”. Liquid assets can quickly and easily be converted to cash with little or no change in value. Almost everyone has some form of liquid asset, even if it’s just a crumpled up $1 bill in their pocket, or spare change in their seat cushions.
Some assets might not necessarily be in your possession. For example, you might be storing something you own at a friend’s house. Location and custody are irrelevant when it comes to disclosure requirements.
Other assets might only be “interests” or “rights” to some “thing of value”. For example, you might own an interest in a patent or copyright. Maybe you are part owner of a corporation.
Other assets might not even be realized yet – they won’t come into your possession for perhaps weeks, months, maybe even years down the road – but your right to them exists presently. These are called “contingent” or “future” interests.
Probably the most common example is the right to a tax refund. Let’s say that it is March 14, 2016. Roughly 20% of 2016 has already passed, and you’ve paid in money to the government for taxes. At the end of the year, you’ll file a tax return, claim a tax refund, and let’s say you get $2,000 back. Even though you won’t get that tax refund until a year from now, you are entitled to $400 of that refund right now – at this point in the calendar.
Other common examples of contingent or future interest includes rights to an inheritance, claims against third parties for injuries or contract breaches, and so forth.
Although the nature of an asset (it’s value, location, or contingent status) does not change whether or not you are required to disclose its asset, the nature of an asset may play a factor in determining whether a trustee will pursue an asset (not withstanding any exemptions you may be entitled to).
Let’s take two examples.
Just to keep things simple – let’s pretend that the only asset you have is $10,000 in cold hard cash. $10,000 is liquid, and easy for a trustee to distribute to creditors. You also only have $8,000 in debt, so if the trustee could go after the cash, he could pay all of your creditors in full. However, you’re entitled to a $12,000 exemption that will protect your cash. It doesn’t matter how you came by the $10k, what you intend to spend it on, where it’s located, or what denominations of currency they exist in. They’re exempt, and therefore, the trustee can’t touch it.
But let’s say you have a lawsuit against a restaurant for a slip-and-fall injury you suffered because their staff neglected to remove ice from their sidewalk. Your attorney is confident that you will win a $50,000 award. You have $120,000 in debt. You are only entitled to exempt say $30,000 of it, leaving $20,000 exposed to the trustee for the benefit of your creditors. Here’s the catch: the restaurant that you’re suing is a big corporation with access to a legal army, and while they may ultimately lose the lawsuit, they’re going to drag the litigation out as long as possible and bury your lawyer in paperwork. Does the trustee pursue the $20k? Probably not. (1) The trustee may have to wait years to recover the asset. (2) Part of the $50k you win will get eaten up by your own attorney’s legal fees, diminishing the $20k available to the trustee. (3) By the time the trustee does recover the non-exempt portions, because of how much you have in debt and the costs of administration, each creditor is likely to get less than 10% of their claim back.
In another example (okay, so I lied – three), let’s say the trustee’s interests are in tangible things – real estate, vehicles, or even household items. Things that are not liquid. Things that must first be sold on the open market and converted into cash. That requires time. That requires hiring a professional (a realtor, an auctioneer). That may require extra legwork like transporting the assets or taking an inventory. All of these things are costs of sale and diminish the “on paper” value of an asset, making non-liquid assets much less desirable by trustees.
To summarize, an asset is any thing or right of claim of value – regardless of how little or great that value is, regardless of the thing’s location, and regardless of when you may actually come to possess that value.
Oh, and one final point. You cannot claim an exemption on an asset you have not disclosed. So your best bet to protecting your assets is to disclose them to your attorney. If you don’t and the asset is discovered (which is a lot easier than most people would guess), you’ll lose it. On the other hand, if your attorney knows about an asset, he can disclose it and exempt it. Even if your attorney cannot exempt the asset, he or she can provide you with options (strategic exemption planning, negotiating, or even Chapter 13
) to help you avoid losing any non-exempt assets to a Chapter 7