Everyone Has Assets

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…

  1. The term “assets” is an extremely broad term that covers a lot of stuff.
  2. 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.
  3. Just because you disclose an asset on your bankruptcy schedules doesn’t mean you’re going to lose an asset.
  4. 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 trustee.

Identifying Unusual Assets & Valuation of Uncommon Assets

This outline was originally presented by Atty. Greg Holbus and Trustee Steve McDonald at the March 11, 2014 Lou Jones seminar in Milwaukee.

The original intent of this presentation was to create a reference guide for attorneys to use in determining the value of certain uncommon or otherwise difficult to value assets.  As attorneys, we prefer primary sources (statutes and case law) whenever possible, so the hope was to find case law that addressed these unusual assets.  After 15 minutes of searching for three assets, it became clear that this approach would go nowhere fast.  In hindsight, this was to be expected.  The lack of case law demonstrates two implicit truths – (1) assets (particularly non-liquid assets) are only worth as much money as someone is willing to pay for them and (2) judges are wisely reluctant to establish binding case law that couldn’t take market conditions into account.
Accordingly, this presentation has evolved to cover three basic topics: identifying assets (particularly those that most people wouldn’t ordinarily think of as an asset); providing a list of documents and information that an attorney should request to help determine an “on paper” value with the understanding that actual market value may be less; and reviewing some of the factors that influence the value of an asset and a trustee’s willingness to pursue an asset that is non-exempt on paper.
The debtor shall file a schedule of assets and liabilities (unless the court orders otherwise).  11 U.S.C. § 521(a)(1)(B)(i)
Asset: an item that is owned and has value.  Black’s Law Dictionary
(I)      Practice Pointers
·         As you proceed through this outline, you may think that some of the items listed here as potential assets go a bit too far or are over-reaching.  My favorite example of this is “unclaimed bonuses, rewards, and points from credit cards and store cards”.  This is the asset that, when it has been brought to the attention of other bankruptcy practitioners, has elicited more than a few giggles – primarily because the value of these assets is often the equivalent of a $25 voucher at Wal-Mart.
·         However, all assets have the potential to be quite valuable.  In the case of credit card rewards, consider a business owner.  His net profits are very low (hence why he is in bankruptcy), but his overall revenue and expense volume might be quite high.  If most of his expenses are put on a credit card and if he is entitled to 1% cash back on purchases, he could easily rack up $1,000 in value once every couple of months.  This alone might not be worthwhile, but if there are already other non-exempt assets, then this extra thousand dollars is nothing to sneeze at.  The point is – you would not have known about the asset if you didn’t ask.
·         Reminder for Debtors: Assets that are not disclosed cannot be taken as exempt.  You’re taking a big gamble not disclosing assets for fear that a trustee might seize them, because if the trustee does discover the asset later, attempts to exempt it later will likely be denied.  This is especially foolish if the asset would have been exempt in the first place.  Don’t presume to know better than your lawyer.
·         Few laymen have an appreciation for the term “assets”.  It has been my personal experience that most clients, upon hearing that I will be inquiring about their assets, have the knee-jerk response that they don’t have any assets.  Others believe that the term only applies to real estate or motor vehicles (i.e. things with legal title).
·         It is incumbent on the attorney to make sure that the client appreciates the full scope of the term.  Merely instructing your client to fill out a packet of forms with no added explanation or guidance is inadequate.
·         Clients generally do not volunteer information unless they believe it will help their case.  They don’t understand what is relevant to the bankruptcy process.  It is your job to flush information out of the client and to identify potential issues.
·         Clients generally do not read the print materials provided to them by their attorneys.  Though I strongly advocate giving plenty of material to read and/or fill out at their own pace, it is also important to review documents with them verbally.
·         Repetition is important.  Between verbal interviews and printed materials, my clients probably hear/read the same questions 5-7 times before their case is filed, and I do that because often, the client won’t think of something until the 5th or 6th time they have been asked about it.
(II)    Identifying Assets / Property of the Estate
·         See 11 U.S.C. § 541
·         Generally, all legal and equitable interests, interests in community property, interests in inheritances within 180 days of filing, certain property recovered by the trustee, and certain profits and proceeds generated by the estate except for services performed by the debtor after the case is filed.
·         Notable exclusions:
·         (b)(5) – funds deposited into an Educational IRA between 1 and 2 years prior to filing (limit of $6,225) and funds deposited within 1 year of filing if not in excess as described in 26 U.S.C. 4973(e).
·         (b)(7) – funds in an ERISA retirement plan, § 457 deferred compensation plan, or 403(b).
·         Real Estate – residences, former residences (that have not yet been foreclosed), business / rental properties, vacant lots, timeshares, hunting land, etc.
·         Most people believe that when they receive a notice of foreclosure, that the property is no longer theirs.  They are not aware of foreclosure procedures or redemption periods, and they’re not aware of which events actually trigger a change in legal title.
·         Motor Vehicles – cars, trucks, vans, motorcycles, boats, ATVs, snowmobiles, trailers, campers, RVs, mobile homes, scooters, mopes, aircraft, etc.
·         Liquid Assets – Cash, Bank Account Balances, Prepaid Debit Cards, Paypal Accounts, Whole Life Insurance, Stocks, Bonds, Redeemable Bonuses/Points/Rewards from Credit Cards & Store Cards, etc.
·         Don’t just ask about the current or next year’s refunds.  Some debtors are waiting on tax refunds from years prior – either because of a late-filed return, an amendment, or re-assessment.  This is a great example of an uncommon twist of an otherwise common asset.
·         Other Non-Liquid Assets – Ownership Interests in Corporate Entities, Trusts, Annuities, IP, Licenses, etc.
·         Contingent / Future Interests – Potential Inheritances, Pending Lawsuits, Unlitigated Claims, Tax Refunds, Life Estates, etc.
·         It is especially important to not overlook pending litigation or unlitigated claims.  Debtors could later be barred from bringing actions under judicial estoppel if a pre-petition claim was not listed on the debtor’s schedule of assets.
·         Although this outline is geared more toward liquidation in Chapter 7, it is also worth pointing out that many districts generally hold that contingent assets and windfalls that become realized during the pendency of a Chapter 13 are property of the estate.  Here in the Eastern District of Wisconsin, contingent assets are generally held to the “rule of halves” (debtor keeps half of the contingent asset, the other half comes into the plan for the added benefit of general unsecured creditors).
(III)  Why Bother with Insignificant Assets?
·         Schedule accuracy – § 521 doesn’t make a distinction between valuable and invaluable assets.
In covering § 341 hearings for other lawyers, I’ve seen a wide range of detail in household goods.  Some of them are very simplistic (Household Goods: $5,000).  I’ll leave it to the trustees to comment on how much detail they think is appropriate.  I certainly don’t think it’s necessary to itemize the number of pens and thumbtacks (and other “junk drawer items”) a debtor has, but I personally feel there should be some reasonable level of detail.  If for no other reason, you’re demonstrating that the debtor has taken some time to seriously consider what stuff they own.  Remember that the federal household goods exemption (11 U.S.C. § 522(d)(3)) is limited to individual items worth less than $575.  If all you write is “Household Goods: $5,000”, then you really haven’t demonstrated to the trustee that your use of the (d)(3) exemption is appropriate.
·         What might commonly be an insignificant asset could – in that one-in-a-million case – be a significant asset that you’re not going to find out about if you don’t ask.  Clients rarely volunteer relevant information.
·         Covering a wide gamut of potential assets will help your client appreciate how broad the term “asset” is, and it could jog their minds to reveal an asset you might not otherwise have discovered.
(IV)  How to Value Certain Assets – What Documents to Request & What Information to Look For
Bear in mind that these are “on paper” valuations.  In reality, what something is worth is what someone is willing to pay for it.
·         Real Estate & Vehicles
§  Be sure to scrutinize the mortgage and title documents to confirm you have a properly perfected lien.
§  If the recording date was less than 90 days before the date you’re filing bankruptcy, look to the contract to ensure that recording happened within 30 days.  (11 U.S.C. § 547(c)(3))
·         Stocks
§  Number of Shares x Price per Share
§  Look to stock statements for number of shares.
§  Price per share is as simple as a Google search.  You can find the exchange and stock symbol simply by searching for the company name plus “stock”.  For example, searching “Wal-Mart stock” will give you NYSE: WMT.  You can plug that back in at any time to Google to get the current price per share the day you file the bankruptcy case.
·         Savings Bonds
§  Ask for a copy of the bonds themselves.
§  All you need is the series, face value, serial number, and issue date – and each item is printed on the bond itself.
·         Ownership Interest in a Business
§  Sole Proprietorship – no separate business entity; “business assets” are personal.
§  Corporations, LLCs, etc. – total value of corporate assets less total amount of corporate liabilities; remember to ask about accounts receivable and accounts payable; review deeds and titles to verify whether real estate or vehicles are owned personally or by the corporate entity.
·         Life Estates
1.       You’ll need a copy of the deed to determine when the life estate was created.
2.       Determine the applicable interest rate under 26 U.S.C. § 7520 based on the month/year the life estate was created.
3.       You’ll need the grantors’ (usu. the parents) dates of birth to determine current age.
4.       Single Living Grantor – use IRS Publication 1457; Table S
Scroll until you find the applicable interest rate determined at step 2.
Locate the age determined at step 3.
The grantor’s interest is in the “Life Estate” column, the grantee’s interest is in the “Remainder” column.
5.       Multiple Living Grantors – use IRS Publication 1457; Table R(2)
You’ll have to reference both grantors’ ages, but otherwise, the process is similar to step 4.
Multiple R(2) tables, based on the applicable interest rate from step 2.
6.       Take into account any joint interests among grantees, and any valid mortgages or other liens encumbering the property.
·         Potential Inheritance
§  Potential benefactor’s age and overall health condition.
§  Potential assets and liabilities.
§  Potential number of beneficiaries.
§  Any known details of a will (per capita or per stirpes distribution, specific bequests).
§  Any known life insurance policies or retirement accounts listing the debtor as beneficiary.
·         Pending or Unlitigated Claims
§  Cause of action.
§  Whether a lawsuit has been filed, and its status if filed.
§  Potential actual damages and potential punitive awards.
§  Likelihood of favorable judgment, settlement, and collectability.
·         Tax Refunds
§  Trustees are entitled to a pro rata amount of the current year’s refunds (e.g. in a case filed on April 15, 2014, the trustee could recover about 28% of the 2014 refunds.  If using wildcard, this amount is usually exempt and the trustee won’t hold a case open that long to recover the refund.  But if using state exemptions, you’ll need to consider this.
·         Money in a Lawyer’s Trust Account
§  Is your client in the middle of a divorce?  Is your client suing someone for personal injury or breach of contract?  It’s worth asking if the client has retained counsel.  If they have, there may be money sitting in that lawyer’s trust account for advanced fees or costs that haven’t been earned.
·         Claim in the Bankruptcy Case of Another
§  Review the debtor’s proof of claim.
§  Check PACER to verify that the claim was timely filed and allowed; that there have been no objections.
§  Where available, review the plan (Chapters 11, 12, or 13) or schedules (Chapter 7) to determine likely distribution.
·         Equitable Interest (e.g. Land Contract)
§  Amount of down payment + total monthly payments paid in so far.
·         Season Tickets
§  License Fee + Face Value of Issued Ticket(s)
·         Whole Life Insurance Policies
§  Recent statements will have the current cash surrender value.
§  When using WI state exemptions, if the policy was issued within the last 24 months, only $4k is exempt.
·         Retirement Accounts
§  Most are not property of the estate under § 541(b)(7).
§  If uncertain if the plan qualifies for an exemption, the plan administrator can usually tell the debtor.
§  Monthly balance statements for value.
§  § 522(d)(10)(E) – payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor
§  § 522(d)(12) – exempt from taxation under 26 U.S.C. §§ 401, 403, 408, 408A, 414, 457, or 501(a).
§  § 815.18(3)(j) – Assets held or amounts payable under any retirement, pension, disability, death benefit, stock bonus, profit sharing plan, annuity, individual retirement account, individual retirement annuity, Keogh, 401-K or similar plan or contract providing benefits by reason of age, illness, disability, death or length of service and payments made to the debtor therefrom.
·         Residual Income
§  Property of the estate under 11 U.S.C. § 541(a)(6).
§  Would include the pro rata amount of the debtor’s next paycheck for work performed pre-petition.
§  More notably, applies to books of business in the insurance industry.  Agents are paid money for contract renewals, which is for work performed pre-petition.  It is possible to sell these books, and although I’ve not had the experience of having to sell one, I’m told that the value is generally computed at 24 months of the typical monthly residual payment.  https://www.agencyequity.com/listings/book-of-business-for-sale
§  If your client is a real estate broker, you’ll need to inquire about any commissions due to them prior to filing the bankruptcy case that have not yet been paid.
·         Trust Beneficiaries
§  Review the trust documents.
§  Most contain a spendthrift provision that prevents the trustee or creditors from making a claim to the debtor’s interest in future payments.
§  In absence of such a provision, the property currently in trust is property of the bankruptcy estate.
·         Annuities
·         Many are exempt as retirement accounts.  Check the establishment documents for ERISA language.
·         Account statements for value.
·         Intellectual Property (copyrights, trademarks, and patents)
·         If the IP has potentially significant value, consider consulting with an IP attorney to discuss valuation.
·         Has the debtor received offers to purchase rights to their IP?
·         Has the debtor received any royalties on account of their IP?
·         Franchise or License Rights
·         Often have restrictions on alienability.
·         Has the debtor received offers to purchase?
·         Does the agreement contain provisions to sell rights back to the franchisor?
(V)    Exemption Planning – Factors Affecting the Trustee’s Decision to Pursue or Abandon a Non-Exempt Asset
·         Nuisance Obstacles
§  Uncertain Markets
§  Non-liquid assets are only as valuable as someone is willing to pay for it.  What something is worth on paper is not necessarily what it is worth in real life, given current market conditions (for better or for worse).
§  Unsatisfied Liens
§  Liens reduce the available equity in property.  Some liens can be avoided.  Others cannot.
§  Joint Ownership Interests
§  Under certain circumstances, a trustee may sell a joint owner’s interest.  See 11 U.S.C. § 363(h).
§  Contingent and Future Ownership Interests
§  How long would creditors have to wait on a contingent asset?  How likely is the asset to actually be realized?
§  Limitations on Alienability
§  Environmental Hazards
·         Administrative Considerations
§  Cost of Liquidation
§  Total Amount to Distribute to Creditors

§  Meaningful Distribution – Percent Yield to Creditors

Tax Season Reminders

As your mailbox fills up with various W2s and 1099s, now is a good time for our annual reminder of certain tax-related issues in bankruptcy.
If you intend to file for bankruptcy (or think you might), do not use your tax refunds to pay unsecured debt until you have consulted with an attorney.  First – you would be wasting money on a debt that could be discharged.  Second – such a payment could be considered a preference and recovered by the Trustee for redistribution.  Third – using tax refunds to pay bankruptcy-related costs can help expedite your case to prevent things like creditor harassment, lawsuits, wage garnishments, bank levies, utility shut-offs, repossessions, and foreclosures.
Tax refunds are generally considered a contingent asset.  Most debtors can exempt their tax refunds and protect them from being seized by the Trustee.  Debtors who do not have sufficient exemptions to protect their refunds can plan their filing strategically to minimize the Trustee’s interest.  (For example, debtors using Wisconsin state exemptions to protect equity in real estate should file shortly after they have received their refund and deposited it, availing themselves to a depository account exemption.  Most other debtors can exempt their tax refunds with federal exemptions.)
All debtors who have filed Chapter 13 bankruptcy are required to submit copies of their tax returns to the Trustee.
Some debtors who have filed Chapter 13 bankruptcy may be required to submit 1/2 of their tax refunds to the Trustee.  Consult your bankruptcy attorney if your are uncertain about this obligation.
Debtors who plan to file under Chapter 13 (but haven’t yet) should plan to file their 2013 tax returns as soon as possible.   Cases filed after December 31, 2013 cannot be confirmed until after the 2013 tax returns are on file (even though they are not due to the IRS and state until 4/15/2014).
Debts discharged in bankruptcy are not income for federal tax purposes.  If you receive a cancellation of debt notice, show it to either your bankruptcy attorney or tax professional.
If you owe tax debt – certain debts more than 3 years old can be discharged in bankruptcy.  Tax debts entitled to priority status (generally, but not limited to taxes 3 years old or younger) can be folded into and paid through a Chapter 13 Plan with no interest.
If you owe tax debt and have already filed Chapter 13 Bankruptcy, notify your attorney immediately.  The IRS can file claims for post-petition taxes that will need to be funded.

Value of Season Tickets

Most of my clients are surprised to learn that season tickets are an asset.  But yes indeed, they are a thing of value that can be sold for money (admittedly, with restrictions) for the benefit of creditors, so yes, they are an asset.  In fact, individual game tickets are technically an asset as well, but considerably less valuable, so the trustees never bother to inquire about them.
Does that mean the trustee is going to take your tickets?  Not necessarily.  Nor you should lie to your attorney about their existence.
Here in Green Bay, people who own season tickets for the Green Bay Packers is fairly common.  Elsewhere in the state, you might find season ticket holders for the Milwaukee Brewers, Milwaukee Admirals, or Milwaukee Bucks.
They are not a common asset of people filing for bankruptcy.  However, I have had about a half dozen cases over the years where my clients held season tickets.  In each case, there was plenty of exemption to cover them.
But it does beg the question – how to value the ticket.
The value of any asset is the price that some third party would pay at an arm’s length transaction.  But that is often hard to pin down.
Presently, the consensus for valuation of season tickets is the license fee (last I checked – $1,400) plus the actual ticket value itself, if it has already been issued.

Chapter 7 Exemption Planning & Strategizing

Before I begin this blog post, I just want to assure you that asset cases (what is described below) are relatively rare in the State of Wisconsin due to fairly generous exemption options.  Just based on informal observation, I’d estimate that fewer than 5% of cases have non-exempt assets that could be administered by a trustee, and fewer still are actually administered.  I say this now so as to not induce panic.  Filing for bankruptcy does NOT necessarily mean that you will lose property.  It is certainly possible, but an experienced attorney can estimate with a reasonable degree of certainty whether your case might have an exemption issue during a free initial consult, before you’ve invested a single dime into bankruptcy.  And worst case scenario, you can always file under Chapter 13 and avoid losing assets altogether.  This article below applies to only a very small number of cases.
So, you’re getting ready to file Chapter 7 Bankruptcy.  You’re at your attorney’s office, and he’s punching his keyboard furiously – polishing off the last of the exemption math.  Then he turns to you and says, “You have $10,000″ in non-exempt equity.”
Perhaps you knew this was coming.  Perhaps this news came out of the blue.  Either way, you have non-exempt assets.  So what does this mean?
Well, if we’re going to get technical and grim about it, it means that you either have to cough up $10,000 to give to the Chapter 7 Trustee, or you have to be prepared to lose whatever asset(s) are exposed.
In reality, you’re not in nearly as much trouble as it looks like on paper.  Over the years, I have filed dozens of what appeared – on paper – to be an “asset case” – sometimes with thousands or even tens of thousands of dollars in non-exempt equity.  And in many cases, the trustee still filed an asset report.  Here are just some of the factors weighing on the trustee’s mind when he decides to pursue or abandon a non-exempt asset…
  1. How much is the trustee going to get paid?  The trustee retains a percentage of the assets he recovers for the work he must perform in distributing the assets.  If the only thing he can go after is $100, the costs of administration will far outweigh the mere pittance he will recover.
  2. How much are the creditors going to get paid?  $10,000 is a lot of money if the unsecured claims are only expected to be $25,000.  Even after administrative costs, creditors would still likely get paid over 33% of what is owed them.  But if you owe $200,000, the percentage is a lot less (less than 5%).
  3. How easy will it be to liquidate?  Is the trustee seizing money in a bank account?  If so, that is easy to convert and use to pay creditors.  But what if the exposed money is in household furniture and appliances?  Even if the trustee realized the full market value that you estimated your stuff to be worth, he still has to go through the process of selling the stuff, and that costs money.  And the likelihood of him selling your stuff for even a fraction of what you think it’s worth is still pretty low.
  4. Is the asset contingent?  Sec. 541 of the bankruptcy code describes “property of the estate” and includes contingent assets – or assets that you are entitled to possess, but do not yet possess.  There are tons of contingent assets.  Rights to tax refunds are the most common.  Unresolved lawsuits, inheritances, and residual income are all examples of possible contingent assets (depending on the specific circumstances).  Okay, so you have a lawsuit pending against someone else for $5,000.  Does that mean the trustee wants to hold open your case for months or years, waiting for it to resolve?  Sometimes he will, but often times, he won’t bother.

It is important to note that all of the above are pragmatic considerations for the Trustee.  That doesn’t mean that you will always get off the hook.  The trustees are also under considerable pressure from the U.S. Trustee to pursue worthwhile assets, and of course, they have a fiduciary duty to unsecured creditors.
Trustees are also human beings.  Understand that sometimes, the trustee’s decision to pursue or abandon an asset could be influenced by what kind of a day he is having and what kind of mood he is in.  For example, if he just landed a million dollar asset case earlier in the day, he probably doesn’t care too much about your thousand dollar case.  On the other hand, if you (believing that the trustee is going to screw you over and take things from you) treat the trustee with hostility and contempt – he might just exercise his full rights just to be vindictive.  Fortunately, trustees in our district are pretty good people and easy to get along with.
Younger trustees tend to scrutinize cases more to look for assets.  With age and experience, apathy tends to follow.  They know an asset case when they see one, and they don’t bother with the tiny cases.
So, what are some strategies you can use to retain as many of your assets as you can?
  1. Don’t try to hide any assets.  Anything not disclosed, if discovered later, cannot be taken as exempt – even if you had plenty of exemption to use.  And trustees WILL go after non-exempt assets, if for no other reason than to make an example of you and deter other people from lying to the bankruptcy court.  Learn from the mistakes of others.
  2. Believe it or not, I have learned that it’s actually better to over-estimate the value of your assets.  Trustees can usually tell if you’ve perhaps been a little too generous about their personal belongings.  They can also tell if you’re short-changing your schedules.  If they believe that is the case, they will scrutinize your schedules moreso, and perhaps hire their own appraiser.  If you thought you had problems with $1k in non-exempt equity, wait until the trustee gets real values and finds out that you actually have $10k exposed.  (It’s worth dispelling a common myth at this point.  Trustees do not actually come out to your home to look at your stuff.  But they can, and they will, if they have good reason to believe you have not been truthful on your schedules.)
  3. Check your exemption options.  For example, Wisconsin residents who have resided in Wisconsin for at least two years may choose between federal exemptions and Wisconsin state exemptions.  Each set has its own benefits and drawbacks, so debtors may select whichever set is most beneficial to them (though they may not mix-and-match).  Which exemptions you are entitled to depends on which state you currently reside in, and which state you have resided in during the past 730 days.  (We’ll discuss residency requirements and exemptions a different day.)
  4. You will have access to a variety of exemptions, which can only be applied toward certain types of property, and most of which have dollar limits to them.  To the extent the exemptions allow you to do so, leave exposed things that are hard for the trustee to sell, like furniture and appliances.  Cover up cash and cash-like items (aka liquid assets, such as bank accounts, whole life insurance policies, retirement accounts, tax refunds, stocks, and bonds).  Then cover up real estate and motor vehicles – yes, the trustee has to sell them, but they’re easier to sell.  Whatever is left – that is what you want to leave exposed.
  5. If there are assets secured by liens that you intend to surrender back to the bank, leave those items exposed, too.  The trustee can try to intervene in a repossession or foreclosure action if he chooses to.  But since you’re already resigned to losing the property, it’s no skin off your nose.  If you have a piece-of-junk snowmobile sitting in your backyard collecting rust that you could care less about – don’t waste exemptions on it if they can be better utilized elsewhere.
  6. Expose contingent assets.  These are things you don’t have yet, and it’s harder to miss things that you never had possession of in the first place.
  7. If the trustee is not willing to abandon assets completely, he is still likely going to be open to a settlement – particularly if you have left exposed contingent or hard-to-sell assets.  He doesn’t want to go through the hassle of administration, or leave a case open for months or years to collect a contingent asset.  He would much rather get a cash payment from you, in exchange for which, he will settle for less than what is exposed.  So, for example, let’s say you have $5k exposed in a car.  The trustee may settle for $3k and you get to keep the car.  Now, this isn’t Chapter 13, so you would be able to stretch payments out for 3-5 years.  In Chapter 7, if the trustee settles, he is going to expect payment pretty promptly.  Sometimes he may give you a month.  Sometimes 3-4 months.  The longest I’ve ever seen a payment plan for was 12 months, and that was for an extremely large asset (as I recall, $60-70k).

Undisclosed Claims & Judicial Estoppel

If you needed another reason to disclose assets to your bankruptcy attorney, here’s one.

Patricia Plaintiff is involved in an auto accident.  She is thinking about suing the other driver for damages.  She is also planning to file for bankruptcy.  Worried that the money she would be entitled to from the accident would be seized by the bankruptcy trustee, she delays filing her lawsuit in the hopes that her bankruptcy attorney (and everyone else involved in the administration of her bankruptcy case) does not learn about the asset.

Patricia Plaintiff made a huge mistake by keeping her potential claim a secret.
  1. She wrongly assumed that the trustee would have a claim to the money.  Federal exemptions currently protect more than $20,000 for a personal injury claim, plus any wildcard exemption that the debtor has remaining.  Wisconsin exemptions can protect the first $50,000 of a personal injury claim.
  2. Because she omitted her contingent asset, she will most likely not be allowed to claim her exemptions later, if and when the asset is discovered.  The exemption she would otherwise have been entitled to can be denied for failure to disclose the asset initially.
  3. Because she did not list the asset on her bankruptcy schedules. she could be barred from filing the lawsuit later due to judicial estoppel, which precludes a party from taking a position in a legal proceeding (the personal injury lawsuit) that is inconsistent with a position the party took in a prior legal proceeding (the bankruptcy case).  In other words, by omitting her personal injury claim, she basically testified to the bankruptcy court that she has no personal injury claim.  She cannot then, later, go into civil court and assert that she has a personal injury claim.

Contingent assets are assets that a person has a future interest in, but does not presently have possession over.  A contingent asset might be of unknown nature or value.  Examples of contingent assets include personal injury claims, breach of contract claims, tax refunds, and inheritances.
Nevertheless, the existence of a contingent asset is still a valid legal interest, even if the value of such an asset is yet to be determined.  The uncertainty of a contingent asset does not excuse a debtor from listing the potential on his bankruptcy schedules.  Care should be taken to disclose as much information about the potential claim as possible, so the trustee can make a determination on the asset.  Sometimes, it is necessary to keep a bankruptcy case open for a long period of time so that the nature and value of the asset can be determined (this does not delay the issuance of a discharge).  Other times, the trustee can predict that the asset will not be worth pursuing, and close the case despite not knowing for certain the ultimate value of the asset.

Another reason to disclose your assets…

Something I try to impart on all of my clients over and over and over again.  Disclose all of your income.  Disclose all of your assets.  It probably won’t affect your case.  And even if it does, it will be less painful to disclose everything than to deal with the consequences if you get busted concealing assets.
Trustees have a new tool to help discover unreported assets – American InfoSource.  American InfoSource provides free services to bankruptcy trustees to locate potential real estate, vehicles, trusts, and other assets that you may have an interest in.
So do yourself a favor, and tell your attorney EVERYTHING.  We can resolve potential issues so much more easily before your case is filed than when you get caught lying after your case is filed.

More thorough lists of terms of art.

In bankruptcy, you hear frequently about “income”, “assets”, and “debts”.  And if the typical bankruptcy debtor was asked to disclose all of these without any further guidance, 9 times out of 10, that debtor would certainly be lost.  Because income means more than just your paycheck.  It can mean social security, business income, even loans and sale profits.  Property doesn’t just mean real estate, but includes vehicles, bank accounts, and stuff you don’t even possess yet, but have a legal interest in.
So what I thought I would do today is create lists of income and assets.  This is not the first time I’ve posted such a list.  But experience teaches us over time to add things to the list.  Still, do not rely on these lists to be entirely exhaustive.
Employment (wages, salaries, commissions, tips, overtime)
Business Income (from a business you own or operate)
Rental Income from Tenants
Child Support, Alimony, or Maintenance
Social Security, SSDI, or SSI
Unemployment Benefits
Workman’s Compensation
Short or Long-Term Disability, VA Disability
Income from Trusts or Annuities
Public Assistance (food stamps, rent or utility assistance, etc.)
Household Contributions (assistance from friends/family to pay bills)
Profits from Sale of Assets
Gambling Winnings
Tribal Per Capita Income
Withdrawals from IRAs, 401(k)s, and Whole Life Insurance
Insurance Payouts
Non-PMSI Loan Income
Student Loans (not dedicated for tuition)  
Real Estate (residence, rental properties, business properties, hunting land, vacant lots, timeshares)
Vehicles (automobiles, motorcycles, ATVs, snowmobiles, boats and watercraft, trailers, campers, RVs, mobile homes, aircraft)
Cash in Wallets, Purses, and Safes
Bank Accounts (checking, savings)
Security Deposits
Sole Proprietorship Business Assets & Ownership Interest in Business Entity (LLC, Corp, etc.)
Stocks and Bonds
Cash Value Life Insurance
Retirement Accounts (pensions, 401(k)s, 403(b)s, IRAs, deferred comp, profit sharing, ESOPs)
Tax Refunds
Accounts Receivable
DSO Arrears
Marital Property Settlements
Potential Lawsuits (personal injury, breach of contract, etc.)
Potential Inheritances / Wills / Trusts / Annuities
Life Estates in Real Property
Sample Household Goods
Sofas, Loveseats, Recliners, Chairs, Ottomans
Coffee Tables, End Tables, Entertainment Centers
Desks & Office Furniture
Cabinets & Shelves
Pillows, Sheets, Comforters, Towels, & Other Linens
Dressers / Armoires
Dining Table / Chairs
Dinnerware (plates, cups, bowls, silverware, etc.)
Cookware (pots, pans, utensils, etc.)
Stove / Oven / Microwave
Refrigerator / Freezer
Other Kitchen Appliances
Washer / Dryer
Computers & Peripherals
Phones & Cell Phones
Other Video Equipment (e.g. DVD Player)
Other Audio Equipment (e.g. CD Player, Radio, iPod)
Other Electronics (e.g. cameras, game consoles, etc.)
 Mirrors, Lamps, Clocks, Rugs
Power Tools / Maintenance Tools
Outdoor Furnishings (e.g. grills, adirondacks)
Lawn Mowers & Snow Blowers
Holiday Decor and Other Decorations
Wedding Rings & Jewelry
CDs & DVDs, etc.
Photographs & Artwork
Firearms & Ammo
Hunting & Fishing Equipment
Sports & Fitness Equipment
Hobby Equipment & Supplies
Musical Instruments
Billiards & Game Tables
Collectibles & Antiques
Season Tickets (e.g. Packers, Brewers, Bucks, Admirals)
Farm Equipment / Livestock / Crops
Aggregate of Minor Miscellaneous Items (cleaning supplies, office supplies, etc.)
Remember that assets may be tangible or intangible, have cash or market value.  You may have legal or equitable ownership interest in the asset.  You may be the sole owner or a partial / joint owner.  You may own the asset presently, or have a contingent / future interest.  Also make note of assets you own that someone else is in possession of, and assets you are in possession of that you do not own.

How to calculate a life estate.

This probably won’t be of much interest to debtors, but I am posting this information so that if I, or any other attorney needs this information, I never have to do this research again, because it is complicated.
For those of you who might be wondering, a life estate basically means that the owner of the life estate becomes a tenant of their own property.  Over time, ownership of the property transfers incrementally to the beneficiaries of the life estate in the form of percentage future interest, culminating with full transfer of the property to the beneficiaries upon the owner’s death.
How to calculate a beneficiary’s future interest in a life estate:

  1. Determine the current age of the life estate owner.
  2. Determine when the life estate was created (look to the date the deed which creates the life estate was first recorded).
  3. Using the date (month/year) determined in Step 2, determine the applicable interest at the time the life estate was created under 26 U.S.C. § 7520.  The table of interest rates can be found at http://www.irs.gov/businesses/small/article/0,,id=112482,00.html if the interest was created this year.  Presently, the IRS has these tables going back to 1997 – to access previous years’ interest rates, go to http://www.irs.gov/businesses/small/article/0,,id=204934,00.html.
  4. Access IRS Publication 1457 and open up Table S, which you can get at http://www.irs.gov/pub/irs-tege/sec_1_table_s_2009.xls.  Scroll down until you find the interest rate you determined in Step 3.  Then locate the age you determined in Step 1.  Slide over to the column for Life Estate, and find your percentage.
  5. Multiply the fair market value of the property by the percentage determined in Step 4.  Then, account for any partial interests or any other encumbrances (such as mortgages, judgment liens, or tax liens) to determine the value of the beneficiary’s future interest.

Bankruptcy & Family Law Intersects: Gay & Lesbian Debtor-Couples

As you know, two debtors who are married to each other may file a joint bankruptcy petition. As Wisconsin does not currently recognize gay marriage, two such spouses are unable to file a joint petition. So today, we’re going to discuss the practical implications of this, and what you need to know.
Under current Wisconsin law, a gay couple living together is basically the equivalent of being roommates for bankruptcy income purposes. Your partner’s income is not counted on the Means Test, nor do they contribute to the household size. This actually ends up being advantageous, because the applicable median income level does not increase dollar for dollar with a typical person’s salary. Meaning that a married couple who must report income of both spouses is more likely to be above median than a single person (although having child dependents can quickly take care of that). For example, take two individuals each making $30k per year. Any one individual is approximately $12k below median. But if they are married, their combined income is about $3k above median.
However, that isn’t to say that your partner’s (or significant other’s) income is completely excluded from the equation. If any portion of the partner’s income is used to contribute to household expenses, then that potion is reportable on the Means Test, as well as Schedule I, the schedule for budgeting income.
Wisconsin being a community property state, each married spouse has a whole, undivided interest in each marital asset. What that means is that instead of husband and wife each having a 50% interest in a piece of property, the husband and wife are considered a single legal entity with a 100% interest in that piece of property. Since gay couples cannot be legally married in this state, they cannot have community property. They can have individual property or they can have joint property. Joint property being where two people have a 50% interest in an asset. Individual property is only a problem for a gay couple if they own a quantity of assets similar to those of a married couple, but it’s all titled in one person’s name. This is the same problem that we frequently encounter with non-filing spouses. I’ll grossly over-simplify this example to illustrate my point. Let’s say there’s a flat amount of property exemptions of $25k. Your average person has $20k in assets. Two average people have $40k in assets. If only one person files (whether we’re talking about a single person in a gay couple or one spouse of a married couple) they cannot double their exemptions. So if all the property is titled in one person’s name, then there’s a chance that the exemption limits will be used up. However, if roughly half of the property owned by the couple is owned by each partner, then it is less likely to be a problem. In the case of jointly-owned property, this is where gay couples actually get an advantage over a married couple with a non-filing spouse. Again, with the married couple, the ownership interest is whole and undivided, so if one spouse opts out of filing, the filing spouse only gets half of the exemptions, but full ownership. If assets are titled jointly between two domestic partners, on the other hand, then it doesn’t matter that the one partner filing is only entitled to half the exemptions, because his interest in those assets is only half the value. Of course, be careful not to transfer an individual ownership interest into a joint ownership interest just prior to filing, as this could be considered a fraudulent conveyance.
Debts are the area where there are usually disadvantages for gay couples. Naturally, if each partner owes individual debts, each person must file a separate bankruptcy to discharge those debt obligations. There are no community debts, just as there are no community assets for LGBT couples, so there can be no benefit from a phantom discharge if only one partner files. Similarly, if two partners apply for a joint credit card, or co-sign on each other’s loans, if only one partner files, then the other partner – the joint debtor – is still fully liable for those joint debts. The only way to protect a non-filing partner from collections is the same way we would protect any other joint debtor / co-signer, which is to file a Chapter 13. Chapter 13 imposes a co-debtor stay during the 3-5 year term of the repayment plan. However, at the end, any joint debts not paid in full would once again become the responsibility of the non-filing partner.Holbus Law Office, LLC is a safe and welcoming environment for LGBT debtors.