Tag Archives: Chapter 7

Abandonment of Property

At the start of a bankruptcy filed under Chapter 7, a debtor creates a bankruptcy estate that includes all interests in property in which you, as the debtor, hold any legal title or equitable. To show why abandonment occurs, if you gave a security interest in property, such as a house with a mortgage, in exchange for a loan, you agreed to a lien on that property created by agreement. A lien is an interest in the property that gives the creditor security for payment of a debt or performance of an obligation. This can create difficulties for the bankruptcy estate’s trustee, who looks for estate property to sell to generate funds to pay creditors some amount of money for what you owe them since the security interest must be paid first, leaving a smaller pot left to divided among other creditors.

The security interest also makes the use of exemptions more likely to succeed in protecting property from being lost during a bankruptcy – if the value of the lien and the amount of any exemptions cover your property’s total value, then a trustee could not generate funds for other creditors by selling the property since the secured creditor must be paid while you are entitled to receive the amount of your exemption. However, if you have a considerable amount of property that you want to keep but lack exemptions to cover all of it, you would need to consider Chapter 13 of the Bankruptcy Code, as Chapter 7 would leave at least some of the property unprotected. Meanwhile, in Chapter 13, plan confirmation regarding debt payments vests property interests in the debtor so the trustee doesn’t have to deal with the issue of abandonment.

Any nonexempt property creates an issue for a Chapter 7 trustee, though. It often will be “abandoned” or may be sold back to the debtor. These options arise because the trustee would have to liquidate the property – this involves converting it into cash and paying creditors of the estate. However, the costs of liquidation would include any liens and taxes that exist as well as costs of handling the sale. Often, this leaves little for distribution. This is why abandonment commonly occurs. The trustee decides how much of a burden the asset is when the estate is being administered or deciding that the asset is of inconsequential value and benefit to the estate. The value and benefit to the estate usually are the deciding factors. If the effort and obligations involved in getting rid of an asset outweigh the benefit that the estate would receive, the trustee has no reason to do anything with it. As a result, abandonment of this property occurs, which often puts the asset back in the debtor’s possession.

 Abandonment may happen during or after the administration of the bankruptcy estate, at some point following the meeting of the creditors when the nonexempt assets are turned over to the trustee’s control. Commonly, the debtor schedules the property when filing for bankruptcy, but it is not administered by the trustee through the closing of the estate. The presumption of abandonment will arise and, if no court order states otherwise, the property remains with the debtor by operation of law. Also, a trustee may pursue abandonment prior to the closing of a case after deciding that the property is too burdensome to administer or, more commonly, determining its value is inconsequential and retention does not benefit the bankruptcy estate, as mentioned earlier. This type of abandonment generally requires notice from the trustee to parties that might have an interest in the property followed by a court hearing if a party objects to abandonment.

 

A party in interest regarding specific property also could file a motion requesting abandonment. The Court would have to sign an order for the property to be abandoned here. While the party bringing the motion usually would be a creditor, the motion could be brought by the debtor who might think that the trustee is waiting for any nonexempt equity to increase in value before finishing the administration of the property, which often is real estate in this situation.

 The Bankruptcy Code does prevent the abandonment of property at times. Property could remain in the bankruptcy estate because it has not been administered or abandoned by the time that the case closes, which could occur when the property that doesn’t appear in the bankruptcy schedules. The trustee cannot administer or abandon unknown property. A debtor might need to reopen the case to attempt to get an order for the abandonment of the property. The cost and the time to do this is a reason for being thorough and forthcoming when you originally decide to file for bankruptcy.

While abandonment can occur at various times and in various ways under the Bankruptcy Code, its impact is what really matters. At the point that abandonment occurs, possession generally remains with the party having possession. Often, the debtor is this person when no security interest exists. However, with property that is used as collateral for a debt, the result could be different. For example, property that was repossessed and remains with the creditor at the time of abandonment may remain with the secured creditor. Often, secured property is under the debtor’s control and will remain there when it is abandoned by the trustee. Since abandonment doesn’t affect the automatic stay’s status, the secured creditor cannot take action to get property returned (for example, via lien enforcement through the legal system).

 

When the automatic stay ends, a secured party can look to non-bankruptcy laws to see what to do to get the property. With real property, this would involve following the foreclosure procedure under state law; if successful, the creditor eventually could have a sale scheduled.

 

Abandoned property and unsecured debts lead to a straightforward result since these debts are discharged and the property is not used as security for any debt – the property remains with the debtor. When secured interests are involved, the ultimate disposition of property becomes less predictable. In Chapter 7, the discharge eliminates personal liability for the amount owed so you can’t be sued for any deficiency, such as when property is sold but the proceeds are less than the debt. (You may have to worry about the IRS, though, because you had a debt obligation of which some portion never has to be repaid – this often is considered income to a person who no longer needs to worry about repayment of the entire debt. The IRS does have an exception regarding primary residences and discharge of indebtedness, though.)

Although you aren’t liable for the debt after abandonment of a secured property interest, the lien that attached to the property itself remains if you did not take care of this issue during the bankruptcy. This is why a secured creditor can take steps to sell the property after obtaining relief from the automatic stay or after the bankruptcy court issues the discharge order in your case. If there is no sale, the debt remains attached to the property. As long as a valid lien under state law exists, a secured creditor has a right to payment from the disposition of this property, although you, as the debtor, have been relieved of personal liability through the Chapter 7 bankruptcy.

 

Chapter 7 Bankruptcy and the Means Test

When the Bankruptcy Code is changed in 2005, the idea that this would force people to file under Chapter 13, which requires a plan to repay as much of your debt as possible, instead of using Chapter 7 to get a “fresh start” by discharging most debts and allowing you to keep most (if not all) of your possessions was a commonly held belief. The new law did have a bias against Chapter 7 bankruptcies, but the reality is that most people still can file under the chapter that gives them their best options.

The means test, which can be used to force you pursue a Chapter 13 bankruptcy, has “safe harbors” that protects the average filer’s choice of which bankruptcy to pursue. For this reason, you need some understanding of this test and when the safe harbor based on income will allow you to consider a range of possibilities, including those under the Bankruptcy Code if necessary, to handle your financial struggles.

Due to the formula involved, we will take a greatly simplified journey through the means test. Its starting point is “current monthly income,” which actually looks at the average income from the previous six months to find a monthly average. Also, the focus is on income from all sources used to pay household expenses of the debtor and the debtor’s dependents on a regular basis during this period. The bankruptcy law provides for various deductions from the total and also excludes some sources of funds from being counted. The most prominent of these would be any benefit received under the Social Security Act. However, not everything paid under this Act is not counted necessarily – for example, the Advisory Committee on Bankruptcy Rules did not include Unemployment Compensation as being excluded. Also, we will see some other sources that are omitted due to the use of data regarding income from the Census Bureau.

“Current monthly income” must be calculated, after which it is multiplied by 12 to turn it into a yearly amount. The new total then can be compared to the median income in your state; the median income is the amount at which half of the households fall below it while the other half will be above it. As mentioned previously, the source of this data is the Census Bureau. For this reason, we have to be aware of various items that it leaves out of its income calculations, including Food Stamps, public-housing benefits, and lump-sum inheritances, so that the comparison is based on the same information. Meanwhile, in addition to income, your household size is important for establishing the median income level, as reported by the Census Bureau, that you would use for the means test. Unfortunately, this is another case in which the bankruptcy law does not provide clear guidance, which has made the definition of the size of any particular household an issue of contention at times.

However, despite the problems with ambiguity with the additions to the bankruptcy law in 2005, the means test eventually does produce an income figure to be compared to the median income borrowed from the Census Bureau. As of May 1, 2014, in Pennsylvania, the median income for a one-person household has been $47,809 while, for a household of two, this rises to $56,690. It continues to increase as the household size increases. The issue now becomes what all of this means to you.

Essentially, it means that the means test will be meaningless to you as long as your household income falls below the median level for a household of the same size in Pennsylvania (or the level for whatever state you live in). You would be in one of the safe harbors that Congress built into the means test. In turn, this means that the “presumption of abuse” (which focuses on a debtor’s ability to repay creditors) does not apply to you so that, if you decide to file for bankruptcy, you should be able to choose the chapter that would be most beneficial in meeting your goals for filing.

Most people who pursue a bankruptcy tend to be under the median income figure that applies to them, which means that the means test that can seem so intimidating due to its complexities actually has no effect on them. For those above the median income, the test will have implications, which can be explored at another time. What matters here is that you generally will not have to worry about the means test with its presumption of abuse preventing you from considering all of your options, including a possible Chapter 7 bankruptcy as a last resort, as you begin rebuilding your financial world.

A Fresh Start: The Bankruptcy Estate in Chapter 7

Most individuals who file for bankruptcy do so under Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 13 can be very powerful when a person falls behind in payments on secured loans, such as mortgages or car loans, because it permits you to set up a plan up to five years in length to pay off those missed payments. However, you still need enough income for your necessary expenses, which include current payments of the debts on which you had fallen behind and are included in the Chapter 13 plan. Meanwhile, a Chapter 7 bankruptcy generally focuses on discharging debts that are not secured by any specific property, with a goal of giving you a “fresh” start by getting rid of these debts while keeping as much property as possible. The process of defining what is in your “bankruptcy estate” is crucial in Chapter 7. A brief look at how this means follows.

A fresh start can have no beginning if you are not honest about what you own. All of your property must be disclosed, with exemptions (with amounts and categories defined by the bankruptcy laws) applied to as much of this property as possible. Any property that can’t be exempted or isn’t excluded by law becomes part of the bankruptcy estate, which a bankruptcy “trustee” controls until the bankruptcy ends.

A major part of the trustee’s job is to sell as much of the bankruptcy  estate as possible in order to pay off as much of your debt as possible. Due to the ability to exempt certain amounts of various categories of property, hiding property is not the answer to protecting what you own in order to have an opportunity to make a fresh start after a Chapter 7 bankruptcy. If and when hidden assets are discovered, this property will end up in the bankruptcy estate, and you may face more serious consequences that can include the loss of the property to creditors, the denial of a discharge of your debts, or even criminal penalties.

As you prepare to file under Chapter 7, you begin the process of defining the bankruptcy estate. This starts with making an inventory of all of the things that you own – this means that you have to list everything to which you have some ownership right. Some property that you receive after filing also would have to be included once a right to it exists. For example, property that you inherit within 180 days after filing must be listed in the appropriate schedule.

After an thorough inventory has been completed, you will have an idea of what might be in your bankruptcy estate. To further define your bankruptcy estate, you need to place realistic values on your ownership rights in this property. Sometimes, this may not be possible due to the type of property involved. A good example of this problem is a potential lawsuit that you might be able to bring against another party because you need to consider what the potential award would be if you win, the likelihood of success (which impacts the value of the estimated award), and even the likely ability to collect any judgment that you might be awarded (because a judgment that can’t be collected won’t have much value). In a situation like this, your best approach may be to describe what your cause of action in the lawsuit would be and list its value as “unknown” when you file.

You usually will be able to place a reasonable value on your property, though. This can seem difficult, but an experienced attorney can help you as you work through the list of property that will comprise your bankruptcy estate, unless the property is exempted or, possibly, excluded by law. However, before you can exempt property, you have to make a good-faith effort to value so you can use the exemptions, which are capped at certain dollar amounts.

Individuals often have trouble with this. Sometimes, they may tend to overvalue some property — for example, many things do not retain much value once they have been used. Clothing and furniture fall into this category, but people often tend to value these items closer to the prices at which they were purchased. One approach to start this process is to consider what you might ask for, and be able to get, for something at a garage sale or on eBay. There also are resources that can be used to value an older car while a house may need to be appraised in order to satisfy a trustee and the court. Once you have an inventory of property in which you have rights and have made a good-faith effort at valuing it, you are at the point in which your actual bankruptcy estate will be defined.

First, you look for property is not part of the bankruptcy estate. An ERISA-qualified pension, by statutory definition, never is part of the estate. Next, you consider possible exemptions, which could be state or federal exemptions in Pennsylvania (with the choice depending on which protects your property to a greater extent). This step essentially removes some property from a bankruptcy estate, depending on the property’s value and the amount of the exemption available. For instance, a vehicle with a market value of less than $3675 currently could be exempted from the bankruptcy estate so the trustee handling your property cannot touch it. It should be noted that federal exemptions are adjusted every 3 years — the next adjustment would occur on April 1, 2016.

Eventually, as you move through the steps in this process, what remains is the property that makes up the bankruptcy estate. In many cases, all property will be exempted – this is a “no asset” bankruptcy in which a trustee has no assets to administer to pay any of your debts; in these situations, there basically is no bankruptcy estate. You also could have a “nominal asset” case in which the bankruptcy estate’s value, at best, is little more than the cost of trustee’s administration of it; you may be able to get the trustee to abandon the property that remains because it can be seen as more trouble to sell it than it is worth. If abandoned, the property would return to you.

On the other hand, if your bankruptcy estate has assets that have more than a nominal value, you might be able to pay the value of the bankruptcy estate to the trustee in order to keep your property or the trustee may sell these items to third parties. In either situation, the trustee would use the proceeds to make payments to your creditors.

In the end, this is why the bankruptcy estate in Chapter 7 is of such importance. You want to retain as much property as possible in order to get a fresh start after going through bankruptcy. This requires that, prior to filing, you to pay attention to property that might be lost if it would be turned over to a trustee as part of your bankruptcy estate.