- Chapter 7 Bankruptcy: Lose Your Debt—And Maybe Lose Some Stuff
- How Do I Protect My Property in Chapter 7 Bankruptcy?
- The Top 5 Assets Most Likely to Be Seized In Chapter 7 Bankruptcy
- Top 5 Assets Most Likely to be Liquidated in Chapter 7 Bankruptcy: The Bottom Line
Certain assets are more likely to be liquidated in a Detroit Chapter 7 bankruptcy proceeding than others.
In fact, every experienced Michigan bankruptcy attorney has a finely tuned antenna to hone in on these specific assets when first discussing a possible bankruptcy case with a potential client. The minute we spot one of these assets listed by potential clients on our Chapter 7 intake questionnaire, a bankruptcy lawyer knows to ask a slew of follow-up questions.
A good bankruptcy attorney knows that, in fact, a Chapter 13 bankruptcy may be a better option for a client with one of these assets most likely to be seized and liquidated in a Chapter 7.
First, why is asset liquidation a possibility in Chapter 7 bankruptcy at all? How does that work?
This Article will explain.
Chapter 7 Bankruptcy: Lose Your Debt—And Maybe Lose Some Stuff
Chapter 7 bankruptcy is a “liquidation” form of bankruptcy. This is true for 2 reasons.
The first reason is that, in Chapter 7, you “liquidate” your debt. That is, your debt is entirely discharged by Order of the Bankruptcy Court without any need to repay it—unless it is one of the forms of debt not dischargeable in bankruptcy by law.
The primary reason, however, is that, in exchange for this enormous debt relief benefit, there is a chance that your assets, or some of your assets, will also be “liquidated” in your Chapter 7 bankruptcy.
Liquidation or the recovery of fraudulently transferred assets are the only means by which your creditors receive any payment toward the debts they are owed when you file Chapter 7 bankruptcy.
How Do I Protect My Property in Chapter 7 Bankruptcy?
Fear not, however. Most people in Metro Detroit who file Chapter 7 bankruptcy do not lose any property all.
This is because Congress intended Chapter 7 bankruptcy to be a fresh start—not a means of further crippling people financially.
Thus, the US Bankruptcy Code contains a variety of provisions known as “Exemptions.”
These “Exemptions” allow Chapter 7 filers to “exempt” or remove certain types of property up to certain dollar value limits from the “Bankruptcy Estate” that is created by operation of law upon filing.
The Chapter 7 Trustee is the individual assigned to a Chapter 7 case by the Bankruptcy Court, when it is filed. It is the Chapter 7 Trustee who seizes non-exempt property and liquidates it for the benefit of your creditors.
However, the Chapter 7 Trustee is only empowered to seize assets within the Bankruptcy Estate.
Any asset that you successfully exempt—by applying one of the Code’s statutory Exemptions to it—in your bankruptcy petition cannot be seized and liquidated. This is because is no longer effectively “within” the Bankruptcy Estate if it has been exempted up to its full fair market dollar value.
The Chapter 7 Trustee has no jurisdiction over fully exempted assets.
Some assets, however, cannot be exempted. Others may not be fully exemptible.
This is because the exemptions, as noted, are specific to different types of property. A 401(k) can be exempted with the retirement account exemption, for example. Jewelry can be exempted with the jewelry exemption. And so on.
There are many such exemptions. But they do not exist for every type of property. And, again, there are those pesky value caps.
You can, for example, exempt some jewelry. But not the Hope Diamond.
The Chapter 7 Bankruptcy process was not intended to allow wealthy or high-asset individuals to skate free of their debts. If you own the Hope Diamond, instead, it is expected that your cursed jewel will be seized and liquidated for your creditors’ benefit.
But household goods, furniture, clothing, and, generally, the typical sorts of property typically found in most typical Michigan households will be safe. Most of the time.
So what assets are most likely to be seized and liquidated?
The Top 5 Assets Most Likely to Be Seized In Chapter 7 Bankruptcy
The assets most likely to be liquidated in Chapter 7 bankruptcy, therefore, are those that have the potential to have high value while enjoying small or no Bankruptcy Code Exemptions.
Cash, bank or credit union account balances, unpaid but earned wages, tax refunds earned but not yet received, and other forms of “cash in hand” assets are completely without any applicable Exemption.
The US Bankruptcy Code does provide for a “Wildcard” Exemption available to any type of property—even cash. However, it is not really a stand-alone, all-purpose exemption. It is actually a portion of the home equity exemption available for your primary residence (“the “Homestead Exemption”).
The Wildcard Exemption is available only if you do not need to use all of the Homestead Exemption to protect your home’s equity. If your home is “underwater” relative to the mortgage balances encumbering its value or if you are a renter and have no equity to worry about protecting in the first place, you may have excess Homestead Exemption that you can use as a “Wildcard Exemption.”
Even if your home is $50,000 underwater, however, you still only get a maximum of about $14,000 in Wildcard Exemption.
If you have cash or other cash-like assets, such as Bitcoin or other cryptocurrencies, above that amount (or you need to use your Wildcard to protect other non-cash assets as well), nothing is easier for a Chapter 7 Trustee to than to demand that you write a check. Immediately.
Likewise stocks, annuities, or brokerage account balances that are not within a tax qualified retirement account, such as an IRA, 401(k), or 403(b) account, will be liquidated in a Chapter 7 bankruptcy.
For practical purposes in Chapter 7, stocks and other such account balances are, from an exemption standpoint, no different than having a pile of cash sitting on your living-room floor.
If you own an “Individual Retirement Annuity,” furthermore, tread carefully. The “IRA” you think will be safe in Chapter 7 actually may not.
A Michigan bankruptcy attorney will be able to discuss the difference in these 2 instruments with you and to review the applicability of a certain exemption available under Michigan law to your account.
Real estate is actually the #1 asset most likely to be seized and liquidated in a Chapter 7 bankruptcy.
Remember that Homestead Exemption, discussed above? Like all of the other exemptions, it has a dollar-value cap. Furthermore, it is applicable only to the real estate in which you actually reside permanently.
It will not apply at all to rental, vacation, holiday, investment, or timeshare property, or to plots of vacant land.
There was a time, a decade or more ago (as of this writing) that a large majority of the real estate owned by prospective Chapter 7 filers in Metro Detroit was underwater.
That time has passed.
You can expect a good, ethical Detroit bankruptcy attorney to require that you have your home appraised by a qualified (certified and licensed) appraiser before he or she agrees to file your Chapter 7 case if you appear to have any equity at all.
Do you own a business?
If so, you can expect your Michigan bankruptcy lawyer to either strongly recommend that you file a Chapter 13 bankruptcy rather than Chapter 7 or to decline to file your Chapter 7 case entirely. That is, unless you are no longer intent upon operating and running the business and allowing the Chapter 7 Trustee to step into your shoes and spin your business and its assets out of existence.
If you own just a share or percentage of a business, the Trustee will only have the powers that you have as joint, co-, or minority owner or shareholder. However, whatever your interest, the Trustee can exercise that interest as if he or she were you.
There is no available exemption for sole or partial business ownership interests. And the value can be high, especially if the business has automobile, real estate, or receivables assets.
Do you insist that the business has no assets, is no operating, and exists “only on paper?”
This could be true. A lot of people form an LLC but then don’t proceed with launching the actual business.
However, you’ll want to discuss this with your Michigan bankruptcy attorney to ensure this is the case before proceeding with a Chapter 7.
Is there a doctor or hospital or someone else that you think you could sue for money damages? Do you have a right to demand payment from someone? Does a friend or family member owe you money?
All of these claims for payment, even if “contingent” upon the filing of and winning a lawsuit that, so far, you haven’t been motivated to file, are assets for which there is no available exemption (other than the Wildcard Exemption).
A Chapter 7 Trustee can stand in your shoes, demand payment, and file the lawsuit for collections or whatever the cause of action.
If the Trustee wins, you don’t get paid, however. Your creditors do. (That said, if enough money is retrieved that the creditors are fully paid, the Trustee’s expenses and fees are fully paid, and there is still money remaining in balance—you will receive that from the Trustee.)
If you meet with a bankruptcy attorney and that attorney fails to ask you if there is anyone you think you could sue even if you don’t want to bother doing it, seek the advice of a more experienced attorney.
That is one of the first questions your Chapter 7 Trustee will ask you on the record at your 341 Meeting of Creditors hearing.
Top 5 Assets Most Likely to be Liquidated in Chapter 7 Bankruptcy: The Bottom Line
The bottom line with regard to Chapter 7 asset liquidation is that you need to retain an experienced bankruptcy attorney if you own any of this type of property.
It is worth remembering that, in Chapter 13 bankruptcy, no assets are ever liquidated. A good Michigan bankruptcy attorney will be able to discuss this process in detail with you.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has represented Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for more than 30 years.
If you are considering filing for bankruptcy in Michigan, contact us now to schedule your free initial consultation.