When you file a Chapter 7 or Chapter 13 bankruptcy case in Michigan, you must disclose all property that you own or to which you have a claim.
This is true no matter where the property is located.
Why must you disclose your property in bankruptcy? How would the Bankruptcy Court know if you did not disclose overseas property? How can property outside of US jurisdiction be seized and liquidated?
These are the questions that this Article will explore.
First, the basic question: why and how must property be disclosed in your Chapter 7 or Chapter 13 bankruptcy petition?
Mandatory Disclosure & Valuation of Property In Michigan Bankruptcy Cases
All property that you own or to which you have a claim must be disclosed in either a Chapter 7 or Chapter 13 bankruptcy case.
Specifically, real estate and personal property are disclosed on Schedules A/B of the Voluntary Bankruptcy Petition form. (The “Schedules” are the disclosure forms for your property, debts, lease obligations, income, and expenses that attached to that Petition form.)
When you file for bankruptcy in Metro Detroit or elsewhere, you are asking the Federal government to relieve you of all of the debt that you owe to your creditors. There are only a few exceptions, such as child support, criminal penalties, or recent taxes, to the discharge of debt that you will receive from a successful Chapter 7 or Chapter 13 bankruptcy case.
Thus, a bankruptcy discharge is an enormous governmental benefit that can truly provide you with a fresh start in life.
The cost of this benefit is, if nothing else later on (more on that below), an agreement that you disclose and enter into the public record pretty much everything about your financial life that the US government wants to know in order to ensure that you are a “good faith debtor” and not engaging in fraud on some level.
A bankruptcy discharge is not available for “bad faith” debtors whose debts were incurred by way of fraud or who have engaged in other funny business.
Thus, one form of “bad faith”—otherwise known as Bankruptcy Fraud, a Federal felony crime—is the failure to disclose assets.
Assets must be disclosed because their value affects the questions of whether your creditors are paid anything for the debts they are owed through the bankruptcy proceeding and how much.
The way in which creditors are paid differs from Chapter 7 to Chapter 13. However, in either form of consumer bankruptcy, the requirement for disclosure of assets and the value of those assets is the same.
If you willfully fail to disclose assets that are later found, a division of the US Department of Justice called the US Trustee’s Office will seek dismissal of your bankruptcy case—and possibly pursue criminal charges against you for Bankruptcy Fraud.
How Are Creditors Paid in Michigan Chapter 7 Bankruptcies?
It is important to note, in discussing this sub-topic, that, when you file a Chapter 7 or Chapter 13 bankruptcy case, you create what is known as the “Bankruptcy Estate.”
This is a legal construct that, by automatic function of law, contains everything you own, have a claim to own (in full or in part), and are owed.
It is similar to a Michigan probate estate, which comes to exist after someone passes away without a proper will or when property needs to be “probated.”
In Chapter 7 bankruptcy, creditors are paid through the liquidation of assets.
When you list your assets in a Chapter 7 bankruptcy in Schedule A/B, you are required to also list a coordinate value for each asset, in fair-market terms. (Warning: what “fair market” means has often been the subject of litigation in Bankruptcy Courts!)
If you own any asset, in full or in part, that cannot be “exempted” from the Bankruptcy Estate, it will be seized by the Chapter 7 Trustee assigned by the Bankruptcy Court to administer your case. It will then be liquidated (auctioned or sold off) in order to generate a pool of cash from which your creditors will be paid.
The Chapter 7 Trustee also receives a percentage of anything liquidated for creditors.
However, most Chapter 7 cases do not involve any asset liquidation at all. This is because the US Bankruptcy Code provides a set of so-called “exemptions” that allow you to remove certain types of property, up to certain dollar-value caps, from the Bankruptcy Estate.
If an item of property is fully exempted up to its full fair-market value, it has been essentially removed from the Bankruptcy Estate, and the Chapter 7 Trustee has no authority to seize and liquidate it.
There are different exemptions for different types of property. Some types of property, such as non-residential real estate, have no exemption protecting them at all.
Any asset not disclosed in your petition is not exempted at all. To exempt property from the Bankruptcy Estate, it must be fully and accurately disclosed or it belongs to the Chapter 7 Trustee.
Creditor Payment in Michigan Chapter 13 Bankruptcies
In Chapter 13 bankruptcies, creditors are not paid through the liquidation of overseas property, or any other sort of property.
Instead, creditors are paid directly by the Chapter 13 Trustee assigned to those chases from the monthly Chapter 13 plan payment you send to the Trustee each month for the 3-5-year duration of the proceeding.
It is beyond the scope of this Article to describe the function or mechanics of the Chapter 13 process in detail. For purposes of this post, the point of note is that assets and property are never liquidated in a Chapter 13 bankruptcy.
This is one of the primary reasons that people choose to file Chapter 13 rather than Chapter 7, in fact.
However, this is not to say that overseas property and other assets need not be disclosed. The same process of asset disclosure, valuation, and exemption is required in the Chapter 13 process.
The difference is that, in a Chapter 13, if you own overseas property or other assets that cannot be exempted from the Bankruptcy Estate, it is not seized and liquidated by the Trustee. Instead, the non-exempt value of the overseas property or other asset constitutes a minimum amount that your unsecured creditors—who are paid last, after all others, by the Chapter 13 Trustee—must receive from your Chapter 13 plan payments in order for your Plan to be approved by the Court.
For example, if you own a villa in the South of France worth $500,000 in fair-market US Dollar terms, your unsecured creditors must be receiving at least $500,000 to split amongst themselves from your Plan. (Or 100% of what they are owed, if you don’t owe a total of $500,000.)
This is a large value number used here on a “just for fun” basis. Most people filing Chapter 7 or Chapter 13 bankruptcy in Detroit will not own a villa in the South of France.
However, Metro Detroit has a very robust immigrant community, and it is not uncommon for assets overseas to require disclosure in Michigan bankruptcy cases.
How Would the Trustee Know About My Overseas Property?
The above answers the “Why?” and “How?” questions with regard to the need to disclose overseas property in your Chapter 7 or Chapter 13 bankruptcy in Michigan.
To put a further point to it, you must disclose overseas property because the Bankruptcy Code—the Federal statute defining the bankruptcy process in the United States—does not limit the extent of the Bankruptcy Estate to assets held domestically.
Thus, when you sign your name to your Voluntary Petition, Schedules, and other bankruptcy documents and file them with the US Bankruptcy Court, your signature attests that you have disclosed all of your assets and all of your creditors under penalty of perjury.
Remember that bit about Bankruptcy Fraud up above?
No bankruptcy attorney wants to hear the question, “Well, how would the Chapter 7 Trustee know about my villa in the South of France if I … just leave it off?”
You will very likely find yourself without an attorney very quickly if you ask a question like that. No flat Chapter 7 fee is worth any bankruptcy attorney’s license, and licensed attorneys do not suborn perjury.
The answer is, “It doesn’t matter. You are required to disclose overseas property. Period.”
A full answer, for those who really need to know, is that you are not as good at hiding your assets as the Chapter 7 Trustee, in particular, is at finding them.
You will turn over a huge volume of information to the Chapter 7 Trustee: tax returns, bank statements, business ownership and stock ownership documentation, income documentation, and more. The time period covered by the Chapter 7 Trustee’s document requests is not limited, but any “high complexity” Chapter 7 debtor can expect to have at least 10 years’ worth of documentation demanded.
Have you been thinking about executing the cloaking of your overseas property for the past 10 years?
The Trustee and his or her staff will note that deduction on that tax return, that dividend payment from the Cayman Islands shell corporation, the withdrawals and debits on your bank statements for the overseas property manager, etc., etc.
They will follow the bread-crumbs. No problem.
Can the Trustee really seize overseas property? Does he or she have that jurisdiction?
In some cases, that answer may be “No.” But, more often than you’d think, it can be done. The Trustee will be perfectly empowered to employ a foreign realtor take care of the necessaries where permitted.
The important thing is that you disclosed it, valued it properly, and filed an honest, “good faith” bankruptcy. If the Trustee looks into the disposition of your overseas property, finds that it cannot legally or for a profit (this is required!) be liquidated, he or she will abandon it as an asset of the Bankruptcy Estate.
You get your discharge and keep your property, in other words.
Or you file a Chapter 13 instead and just pay its value to your creditors.
Overseas Property In Michigan Bankruptcy: The Bottom Line
The bottom line is that, if you own overseas property and overseas real estate in particular, there is no exemption available to “protect” this asset in Chapter 7 or Chapter 13 bankruptcy other than what we commonly call the “wildcard exemption”, which can be used to protect any asset up to approximately $13,000 in value.
If you do own overseas property, yours is not an “easy” Chapter 7 case from the get-go. You would be, in this situation, exceedingly unwise to attempt to file your bankruptcy case on your own with legal assistance.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully assisted thousands of Metro Detroiters in Chapter 7 and Chapter 13 bankruptcy proceedings for over 30 years.
If you are considering filing for bankruptcy and you own overseas property, contact us now to schedule your free, initial consultation before making any decision.