Bankruptcy by Example: Keep What You Own Under Chapter 7 Even If It’s Not Protected by an Exemption

Chapter 13 provides a good way to protect a non-exempt asset. But sometimes that can also be accomplished through a simpler Chapter 7 case.

For Most People, Everything They Own is Protected

Especially since a new law went into effect on July 1, 2013, most of our clients who have needed to file a Chapter 7 “straight bankruptcy” have been able to do so without any concern about losing anything they own to the bankruptcy trustee (and thus to their creditors). That’s because every they owned was protected, or “exempt.”

The available exemptions were significantly broadened as of July of 2013 because at that point the State of Oregon allowed people filing bankruptcy here to use the federal set of exemptions that are in the Bankruptcy Code, not just the Oregon exemptions as had been the case before then. The federal exemptions are generally more generous and flexible, making it more likely that our clients’ assets would be fully protected.

But Sometimes Something is Still Not Protected

But what if you do own one or more assets that you want to keep and are still not exempt?

Chapter 13 can sometimes be a good way to keep such assets. That’s particularly true if you need to file a Chapter 13 case anyway because of its many powerful tools for dealing with creditors. We’ll cover that in our next blog post.

But especially if there are no other reasons for getting into the three-to-five-year Chapter 13 process, that may well not be your best option. The question is whether your non-exempt assets can be protected even within a Chapter 7 case.

Here’s an example illustrating how it could work.

Saving Your Boat (Or Any Other Favorite Asset)

Let’s assume that Steve owns a free and clear classic motorboat with a fair market value of $4,000, and that it would not be at all exempt under either the Oregon or federal exemptions. This boat was given to Steve by his grandfather a few years ago before he died, and has been in the family for decades. So this boat has major sentimental value to Steve. He has no special debts or other circumstances that would make Chapter 13 a good option for him, and he does not want to sign up for a process that would take at least three years to complete.

Negotiate with the Chapter 7 Trustee

Steve’s attorney recommends that he file a Chapter 7 case, with the attorney to negotiate an agreement with the bankruptcy trustee for Steve to be able to keep the boat in return for paying its liquidation value.

The primary job of Chapter 7 trustees is to gather non-exempt assets from debtors, liquidate those assets, and distribute the cash proceeds. Trustees don’t care where that cash comes from—a purchaser or the debtor himself—as long as the amount is legally adequate, and is paid within a reasonable time. (Actually, because in most consumer cases there are no non-exempt assets, most of the time the trustee simply verifies that there is nothing to liquidate.)

Before filing his Chapter 7 case, Steve and his attorney carefully figure out that if Steve reasonably scrimped on his budget, he would be able to pay a Chapter 7 trustee $400 per month for 10 or so months. They agree that would be a reasonable settlement with the trustee. Steve already has an appraisal from a reputable local boat broker justifying a present fair market value of $4,000. Steve’ attorney advises him that if he doesn’t make whatever payments are agreed upon with the trustee, Steve could very well lose his right to get a discharge of his debts. He accepts that condition.

Steve’s Chapter 7 is filed. His attorney negotiates an agreement with the trustee for Steve to pay 9 monthly payments of $400, for a total of $3,600. He gets a 10% reduction from the $4,000 value, partly reflecting the reality that the trustee will not need to use a boat broker to sell the boat, his 20% commission. The 10% reduction splits the difference, given the delay and risk of the trustee not getting paid in a lump sum.

Mission Accomplished

Steve saves his loved motorboat, avoids getting tied into much longer Chapter 13 case, and gets a discharge of all his debts about three months after filing his Chapter 7 case.