Mid-Week Bankruptcy Case Review – Issue 4

Issue 04 – November 15, 2010

RE: UNEXEMPT EQUITY IN A CHAPTER 7

When Mary Doe (fictitious name) filed her Chapter 7 bankruptcy petition, the attorney used the Kelly Blue Book TRADE IN value for her car on Schedule B; which was $5,200.  The attorney was not aware that the local Trustee used the PRIVATE PARTY value from the Edmunds website.  The Trustee claimed that by using Edmunds and the Private Party value, he determined the market value of the car to be $7,800 instead of $5,200 and objected to the granting of a discharge until the unexempt equity ($4,500) was paid or the items would be seized and sold by the court.

From the courts point of view, this scenario makes perfect sense. Mary is asking the court and her creditors to forgive her of over $200,000 in debt resulting from a foreclosure and medical bills.  In exchange, she only needs to pay the court $4,500 in unexempt equity.  But from a human point of view this news is devastating because Mary is penniless. After paying her basic living expenses, she has less than $5 in cash to live on.  How can she pay the court $4,500?

Some people may say that Mary should find a job and increase her income; but Mary lost the muscle control in her hips and legs from 18 years of uncontrollable diabetes. She now must use a cane to walk short distances and a wheelchair for longer distances. Therefore, Mary is severely limited in her ability to earn an income outside the home.

In addition, Mary’s car is her only mode of transportation and she has no living relatives or friends that live close enough to provide daily transportation to meet her basic needs. If Mary loses her car, she will be unable to get to the doctor and the grocery store, thereby causing her to eventually become an award of the state as she would be forced on welfare simply to survive.

POSSIBLE SOLUTION NO. 1

The Chapter 7 may be able to be dismissed due to the fact that Mary would be placed in a hardship (much worse than she would have been prior to filing bankruptcy) if the present bankruptcy were to continue.  However, in order to dismiss the case, it would require the filing of a pleading and a court hearing would need to be scheduled in order to render a Judge’s decision on the matter.  Mary may also need to hire an attorney to represent her at the hearing, which she clearly cannot afford.

Note: Debtors are normally prevented from dismissing a Chapter 7 case when unexempt equity is involved, which is different from how unexempt equity is treated in a Chapter 13 filing.

But there is a problem; once the Chapter 7 case would be dismissed, Mary would be back to Square One and still owe her creditors $200,000; therefore, they would begin collection procedures again.  Since Mary has already revealed her car as an asset in the bankruptcy filing, the creditors will know this asset exists and would naturally file a lien against it and take the car anyway.

POSSIBLE SOLUTION NO. 2

Working with the attorney we naturally came to the conclusion that Possible Solution No. 1 was not in the debtor’s best interest.  Eliminating this solution left us with the only possible choice and that was to come to an agreement with the Trustee on the amount of unexempt equity Mary needs to pay back.

To do this, the debtor had to agree as to the true market value of her car.  She visited three different automobile dealers: (1) dealers who sold new and used cars; (2) dealers who only sold used cars; and (3) Buy Here Pay Here car lots.  She obtained a written proposal from each which amounted to $6,400, $6,700 and $6,900 respectively.

The attorney called the Trustee and convinced him to allow the lower $6,400 estimate simply because Mary was penniless and unable to afford to replace her current vehicle.  In doing so, this left Mary with unexempt equity of $3,100.  Due to Mary’s financial condition, the Trustee also agreed to accept monthly payments in the amount of $258.34 so she could keep her car.

Problem:  Although this appears to be a better solution for Mary compared to Possible Solution No. 1, where is Mary going to get the extra $258.34 per month to pay the Trustee?  Besides, if Mary agrees to make these payments, the Trustee will want to know where this extra money was obtained and why it was not included as income on Schedule I when the petition was filed.

Important Lesson:  Many Trustee’s use this approach when a Chapter 7 is filed because they are able to determine if the debtor has lied about their true income. By placing a debtors assets on the line and threatening to take them away, debtors often come up with extra money and then the Trustee can dismiss the case because the debtors committed perjury by misrepresenting their income on Schedule I.

At this point is when a discussion with Mary was necessary in order to resolve the issue.  When I contacted Mary (on behalf of the attorney) she said that her ex-husband offered to make the necessary monthly payment so that she would not lose her only mode of transportation.  Once the Trustee accepted the newly proposed amount of unexempt equity. Mary’s cousin mailed a check for $258.34 to the Trustee every month and satisfied the court’s requirement.

What if …?

What would have happened if Mary told us she would pay the $258.34 to the Trustee each month to keep her car?  Before making a proposal to the Trustee we would need to know where she obtained this additional money and why it was not reported on Schedule I.

If Mary had recently received a raise in salary, we would need to amend Schedule I to report the new income and obtain pay check stubs (which would be used as Exhibits) to verify the increase in salary. If Mary said she rented a room in her home to get the extra money we would need a copy of the rental agreement.

But in Mary’s case, her ex-husband agreed to make the payments because he knew that Mary was penniless and would be on welfare if she lost her car.  In addition, the ex-husband knew he could not buy a reliable replacement vehicle for $3,100.  In this case, the ex-husband wrote a letter to the Trustee stating that he agreed to make the payments and the ex-husband made these payments directly from his personal checking account throughout the payment duration.

Are You An Overworked Bankruptcy Attorney?

We are accepting new attorney clients. Please give me a call at 719-465-2442 to discuss your bankruptcy case needs. I am normally in the office from 10:00 am to 8:00 pm Mountain Standard Time.

Talk to you next week ….

Victoria Ring
Colorado Bankruptcy Training
http://www.coloradobankruptcytraining.com

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