Tag Archives: Chapter 7

AVOIDING JUNIOR MORTGAGES & CHAPTER 7

Alberts Law, Debt Relief & Bankruptcy, , , ,

Bank of America, N. A. v. Caulkett from U.S. Supreme Court (2015) currently is the defining case regarding avoiding junior mortgages in a bankruptcy filed under Chapter 7. It may not be the last word on this issue, but it does set forth the current law.

Caulkett held that a debtor in a Chapter 7 bankruptcy proceeding may not permit avoiding  junior mortgages under 11 U.S. Code §506(d) if the debt owed on a senior mortgage lien exceeds the current value of the collateral while the credi­tor’s junior claim is secured by a lien and allowed under §502 of the Bankruptcy Code (found in Title 11 of the U.S. Code).

CLOSER LOOK AT “SECURED” AND “UNSECURED” CLAIMS IN BANKRUPTCIES

Defining the term “secured claim” is not easy as context plays a large role in this. 11 U.S. Code §506 is the provision in the Bankruptcy Code that defines “[d]etermination of secured status.” However, case law interprets the meaning of statutes. Dewsnup v. Timm from U.S. Supreme Court (1992) defined a “secured claim” in §506(d) to mean a claim supported by a security interest in property, without any consideration of whether the value of that property would be suffi­cient to cover the claim.

The Supreme Court in Dewsnup concluded that an allowed claim (under §502) that is “secured by a lien with recourse to the underlying collateral . . . does not come within the scope of §506(d),” which could permit the debtor to avoid the lien on the collateral. However, there is a “secured claim” under Dewsnup because the claim is supported by a security interest in property, even though the value of that property is not sufficient to cover the claim. Furthermore, Caulkett states that a claim secured by a lien that also qualifies as an allowed claim under §502 cannot be voided under the Bankruptcy Code.

IMPACT OF NOT REQUIRING FILING OF A PROOF OF CLAIM IN A NO-ASSET CHAPTER 7

According to 11 U.S. Code § 502 (“Allowance of claims or interests”), a claim or interest – upon the filing of a proof pursuant to §501 of this Code – is deemed “allowed” unless a party in interest objects. As noted in In re Smoot from the U.S. Bankruptcy Court in the Eastern District of New York (2011), one can argue that, in a no-asset chapter 7 case, the adjudicative process for claims is not even invoked because claims need not be filed; therefore, a junior mortgage claim is going to be deemed allowed under 11 U.S.C. § 502(a).

Here, a filed proof of claim to determine if a claim or interest against the Debtor’s property should be allowed is not required. Whether or not any assets are available for distribution to general unsecured creditors is not an issue in such situations. Instead, the determination of whether a lien or interest against property is unsecured, leaving it disallowed as a secured claim, is made independent of the existence of assets to be distributed to the general unsecured creditors.

“ANTIMODIFICATION” PROVISION IN CHAPTER 13 & ITS NONEXISTENCE IN CHAPTER 7

The “antimodification” provision in (b)(2) of 11 U.S.C. §1322 does not apply regarding avoiding  junior mortgages that are wholly unsecured on a Chapter 13 debtor’s home. The Third Circuit decided that, because the U.S. Supreme Court in Nobelman stated that § 506(a) still applies and determines the “status” of a creditor’s claim, a wholly unsecured junior mortgage ceases to be a secured claim under the Bankruptcy Code and hence is not subject to the “antimodification” clause. However, because there is no similar provision in Chapter 7 of the Bankruptcy Code, this reasoning from the Third Circuit’s In re McDonald cannot be directly applied to the issue of avoiding junior mortgages in bankruptcies under Chapter 7.

LOOKING AT DIFFERENCES BETWEEN JUDICIAL LIENS & MORTGAGE LIENS

When entered of record, the judgment also operates as a lien upon all real property of the debtor in that county — in Pennsylvania, see 42 Pa.C.S. Sections 4303(a)(b), 1722(b), and 2737(3). Due to this, a judgment lien is called a general lien. Meanwhile, a mortgage lien is a specific lien that encumbers a particular piece of real property. Additionally, the Bankruptcy Code and related case law have defined these two liens quite differently, which can explain why they receive different treatment when the issue of avoiding junior mortgages comes into play.

The Bankruptcy Code defines the judicial lien in Section 101(36) as those obtained by judgment, levy, or other legal or equitable processes. Under Section 522(f) of the Code, judicial liens that impair exemptions provided in bankruptcy law can be avoided so liens that fit this definition must be involved. On the other hand, mortgage liens are said to be “bargained for” and consensual, as opposed to judicial liens which are viewed as imposed by the legal system.

Mortgage liens are part of an agreement between lenders and borrowers. People are free to make deals that they later regret, and the government generally does not feel obligated to save them from themselves. This helps to explain why the opportunities of avoiding junior mortgages are more limited. Section 506, in conjunction with Section 502, sets forth the only mechanism in the Bankruptcy Code for seeking to avoid these liens while both methods of avoidance could be explored for avoiding judicial liens.

AVOIDANCE WHEN OBLIGATION IS SECURED BY MULTIPLE AGREEMENTS

When an obligation is secured by more than one agreement, the extinguishment of a debtor’s obligation under one agreement does not necessarily end all of the obligations. However, in In re Stendardo from Pennsylvania, the bankruptcy court concluded that any right the creditor had to attorney’s fees and costs under the note was extinguished once it entered judgment on the note.

The analysis did not end at this point, though. The court went on to hold that the rights created by the continuing lien of the secured creditor’s mortgage and its asset purchase agreement that also secured the debtor’s obligation were not extinguished until the creditor received payment. In addition, the court cited In re Clark Grind & Polish, Inc., 137 B.R. 172 (Bankr.W.D. Pa. 1992), which stated that a confessed judgment on the promissory note did not extinguish the independent provisions of the mortgage and the asset purchase agreement. Since the various debt instruments were not seen as relying on each other for their continued existence, when one ceased to exist, the others still remained in place.

DIFFERENT INTEPRETATIONS OF SECTION 506 IN CHAPTER 13 & CHAPTER 7

U.S. Bankruptcy Court for the Eastern District of Pennsylvania noted in In re Cusato that “a discharge extinguishes only the personal liability of the debtor [while] a creditor’s right to foreclose on the mortgage survives or passes through the bankruptcy.” While the debt that was owed by the mortgagor cannot be obtained from the mortgagor after a discharge, the mortgagee retains the ability to pursue a judgment against the property to obtain a foreclosure sale to satisfy the mortgage lien on the property. This highlights the importance of Section 506’s applicability, as it can result in a mortgage debt being treated as an unsecured debt that would be discharged at the completion of the bankruptcy case, which could be permitted in Chapter 13 bankruptcies. When this occurs, a mortgage lender has no recourse for seeking repayment.

Courts, in the belief that Chapter 7 debtors would reap a windfall if in personam and in rem liabilities were eliminated through the bankruptcy action, have read and applied laws such as 11 U.S. Code §506 more strictly in Chapter 7 cases. The idea that the impact is different for debtors in Chapter 7 versus those in Chapter 13 could be viewed as unfair, but it seems to stem from the belief that a Chapter 7 debtor can walk away from a discharge without paying any money to creditors while the debtor in Chapter 13 will repay some amount on debts under a Chapter13 Plan. However, the justification for differing treatment of debtors regarding avoiding junior mortgages that are wholly underwater and are not subjects to payments under either bankruptcy chapter could be questioned. However, at this point in time, while potentially questionable, it also is unquestionably the applicable law under these circumstances.

Surrender of Property in Consumer Bankruptcy

Alberts Law, Debt Relief & Bankruptcy, , , , ,

When individuals with sizable debts decide to file for bankruptcy, they face other decisions that include whether or not to surrender property in their possession. The property to be surrendered secures debt that no longer can be paid. The implications of this decision are defined by definition of “surrender.” This is the necessary starting point.

What Does Surrender Really Mean?

The Bankruptcy Code does not provide a definition of the word. Instead, one is left to reviewing cases to determine what actually happens when property is surrendered. Also, property surrender can occur in Chapter 13 as well as Chapter 7. The main focus is on Chapter 7 bankruptcies since it is more often seen in this context. Following this post is a look at instances in which Chapter 13 surrenders can differ from those under Chapter 7 as well as what the differences can mean to debtors.

One Analysis of Surrender

In re Kasper is a 2004 case involving a Chapter 7 bankruptcy decided by the U.S. District Court in Washington, D.C. It provides an extensive analysis of relevant parts of the Bankruptcy Code to interpret “surrender.” The debtor had filed for bankruptcy under Chapter 7. As a result, he had to file a Statement of Intention regarding what he planned to do with property that acted as collateral for secured loans according to Section 521 of the Bankruptcy Code.

The debtor filed this form but did not select any of the choices that were listed. Instead, since he was current with the loan payments owed to Ford Motor Credit Company, the debtor’s stated intent was to “retain possession” of the car (which had a loan balance greater than the car’s current value).

Before the estate closed, Ford filed a motion to compel the debtor to file a statement in which he had to make one of three choices: surrender the property; redeem the property; or reaffirm the debt. Redemption would involve the payment of the amount of the allowed secured claim on the property. Reaffirmation restores personal liability that would cease with the closing of the case, although the car itself still would be collateral for the debt.

Defining “surrender” was the key to the court’s decision regarding the motion. The court focused on the 3 options listed with the retention of property in the Statement of Intention. These are exempting property, redeeming property, and reaffirming debt. A person who decides to retain property can choose among these options “if applicable.”

This interpretation led the court to see “surrender” as meaning turning over property to the trustee (and not directly to the lienholder) for administration under the debtor’s surrender obligation in  Section 521(a)(4) of the Code. Essentially, this would result in the car being subject to any lien enforcement rights under nonbankruptcy law that the creditor could exercise after the Chapter 7 automatic stay ended. The court denied Ford’s motion, believing that the debtor actually stated the intention to surrender the collateral to the trustee’s administration. This would result in Ford eventually having the option to enforce its rights under nonbankruptcy laws to get the car returned to it.

Courts Have Differed In Interpreting Surrender

Other courts, including the Bankruptcy Court for the Western District of Pennsylvania, have not made as an extensive of an analysis of “surrender” and have found a simpler meaning that seems to leave out a step (although the Bankruptcy Code’s lack of a clear definition for “surrender” makes this debatable). For example, in In re Losak (2007), the Western District of Pennsylvania decided that surrender means that collateral is given to the lienholder, which then can decide to pursue its rights under nonbankruptcy law. In re Failla, from Florida’s Southern District in 2014, focused on surrender meaning that a debtor agrees to not fight the lienholder’s exercise of rights under nonbankruptcy law. Of course, the endpoint is the same, and, ultimately, this is what matters.

When property that secures a debt is surrendered, a lienholder can pursue enforcement rights via nonbankruptcy law while the debtor indicates no intent to fight these actions, as long as those laws are not violated (see In re Ryan, 560 B.R. 339 (2016), from Hawaii that makes this point). However, until the creditor acts, the debtor retains title or ownership in the property. This last point is the main concern: surrender, by itself, does not change the owner of property.

Implications of Surrender for the Debtor Remain the Same

Since the owner has not changed, who is responsible for the property has not changed unless there is further action. Many debtors who have decided to surrender property seem to be caught unaware of the implications of this.

The Statement of Intention in Chapter 7 provides a blueprint for the future because the debtor does not transfer ownership or title immediately to the creditor. The implications are easiest to see if real property is involved. When a house secured by a mortgage note is surrendered, the debtor’s obligation regarding the mortgage payments and any deficiency balance that may exist will cease after the bankruptcy. While personal liability ends, there remains a property lien on which the creditor can foreclose. Obligations that arise after the date that the bankruptcy was filed belong to whoever is the named owner on the deed.

Problems When the Creditor Is In No Hurry to Foreclose On a House

The debtor’s problem is that the creditor may decide not to foreclose, and, until a foreclosure sale occurs, the debtor remains the person whose name is on the deed. This leads to consequences that a debtor often did not anticipate when the surrender option was chosen.

As long as the debtor in bankruptcy remains the owner on the deed, this individual remains responsible for property taxes that will be assessed. In addition, if a third party gets injured while on the property, the record owner of the property could face liability. This means that insurance should be maintained, despite the surrender of the property. Maintenance and upkeep also must be considered – for example, some utilities may need to remain turned on, and the debtor will get the bills.

The individual could look at options to get rid of the property when the creditor is in no hurry to foreclose. The property potentially could be sold, but anyone who has a lien in place must agree to the sale. Offering a deed in lieu of foreclose is a possibility, but acceptance by the creditor is not likely. Then again, the debtor could wait for the foreclosure process to occur, although a Chapter 7 bankruptcy as well as nonbankruptcy laws do not provide ways to force the issue. However, even after a surrender of this property, the debtor could decide to remain there as long as possible because ownership has not changed. Depending on the condition of the real estate, this could be the best choice.

Consider Possible Problems When Surrendering Property

Other types of property securing debts that were surrendered during the course of the bankruptcy can present similar problems, although on a somewhat smaller scale. A car must be maintained and insured, for example. If the debtor’s name remains on the title, then the debtor will be responsible for the collateral. Therefore, whenever property surrender is the chosen method of dealing with secured debt, the debtor filing the Statement of Intention under Chapter 7 first must consider the consequences since surrender does not mean an instantaneous change in ownership.

A Few Words about Surrender in Chapter 13

A Chapter 13 bankruptcy can involve surrender of property, too. This can occur when the Chapter 13 plan does not provide for payments regarding property that secures a debt. The creditor in this situation may pursue a deficiency claim and follows this by participating in the distributions to unsecured creditors. This debt must be handled in this way because, after the collateral has been surrendered under this chapter, the debt that had secured specific property becomes unsecured debt.

However, the surrender of property in Chapter 13 does not automatically change ownership of that property so debtors are in the same position here as with a Chapter 7. There is a potential mechanism for a surrender to result in the creditor being forced to take ownership in a Chapter 13 bankruptcy. When a debtor’s Chapter 13 plan is confirmed, the case does not end because the plan may take 3 to 5 years to be completed. During this time, the Bankruptcy Court continues to have jurisdiction over issues involving the plan. If a confirmed plan’s success is jeopardized when a creditor leaves property to be returned in limbo, the Court could issue an order that forces the completion of the transfer.

Abandonment of Property

Alberts Law, , , ,

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

Alberts Law, Debt Relief & Bankruptcy, , ,

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

Alberts Law, Debt Relief & Bankruptcy, , ,

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.