Category Archives: Bankruptcy Exemptions

TEXAS BANKRUPTCY: IS THE TRUSTEE GOING TO TAKE MY POSSESSIONS?

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Chapter 7 bankruptcy is sometimes referred to as a “liquidation” bankruptcy case.  However, in practice there is very little liquidation of property.  Most Texas bankruptcy debtors find that they don’t lose any of their property in Chapter 7 bankruptcy.

When a person files bankruptcy they have to list all of their property and what they think it is worth.  This is a very imprecise process for most personal property, which is everything you own except land.  As a general rule, we try to estimate what the property would sell for at a garage sale or if you sold it on Craig’s List.  Some property does not retain its value over time.  For example, we usually estimate that clothing will sell for about 10% of what you paid for it.  For automobiles we use the clean retail value as calculated by NADA.  For homes we generally use the tax appraisal value.  Keep in mind that the NADA and the tax appraisal value are simply starting points.  You must consider damage to the property that lowers its value or upgrades to property that have increased its value, as well as any other factors that affect the property’s value.

 

Once we establish the value of the property we apply exemptions.  Exemptions are laws that allow you to protect specific types of property from liquidation by creditors or in bankruptcy.  Exemptions have their limitations though.  For example, you may be able to exempt a Toyota Corolla but you probably would not be able to exempt a Ferrari.  Every state has its own set of exemptions and many states also allow you to use Federal exemptions as well.  Texas is one of the states that allows Federal exemptions.  In fact, the combination of Texas and Federal exemptions provides a lot of flexibility in protecting property.  Texas is a very good state in which to file bankruptcy.

 

The bottom line is that if you qualify for Texas exemptions, meaning that you have lived in Texas for at least two years, then it is unlikely that you will have any property liquidated in Chapter 7 bankruptcy.  Of course, before filing Chapter 7 you should discuss how your assets will be affected with an experienced bankruptcy attorney.

BANKRUPTCY: SCHWAB V. RILEY – WHAT EXACTLY ARE WE EXEMPTING?

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Bankruptcy law doesn’t seem to get much attention from the Supreme Court.  So on June 17, 2010 when the Supreme Court decided Schwab v. Reilly, bankruptcy attorneys, judges, and trustees paid close attention to the Court’s holding, which explained what debtors are protecting when they claim an exemption in bankruptcy. 130 S.Ct. 2652 (2010).  In Schwab, the debtor exempted kitchen equipment valued at $10,718.00.  The trustee was aware that the equipment had been appraised for $17,200.00 but did not file an objection to the debtor’s exemptions before the deadline to do so passed.  After the deadline, the trustee moved the bankruptcy court for permission to auction the equipment so he could acquire the excess value for the bankruptcy estate.  The bankruptcy court denied the trustee’s motion to auction the equipment.  This decision was affirmed by both the district court and the court of appeals.

 

The Supreme Court reversed the lower courts’ decisions, holding that “in cases such as this, an interested party need not object to an exemption claimed in this manner in order to preserve the estate’s ability to recover value in the asset beyond the dollar value the debtor expressly declared exempt.”  Id. at 2659.  The Court explained that when choosing exemptions, the debtor is not exempting the property but rather is exempting the debtor’s interest in the property.  The debtor in Schwab did not exempt her kitchen equipment.  She exempted a $10,718.00 interest in the equipment.  The additional value of the property was nonexempt and could be realized for the bankruptcy estate.  Since the Trustee did not object to the exemption, whether or not the deadline to object to exemptions had passed was irrelevant.