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Oregon Legislature Increases “Tools of Trade” Exemption to $5,000

Both the Oregon House and Senate have unanimously passed an increase in the “tools of trade” exemption from $3,000 to $5,000. This change will go into effect the day that Governor Kitzhaber signs the bill into law. If you are self-employed or own a business and need to be thinking about filing bankruptcy, this increase could make a big difference. It makes it more likely that you would be able to keep all of your business tools, equipment, or just about anything that you need to stay in business. This increase could make an even bigger difference than it sounds because of a number of multiplier effects.

But first a quick reminder of how property exemptions work in bankruptcy. An exemption is the dollar amount of a particular kind of property which the state has decided you should be allowed to keep instead of having to give to your creditors to satisfy their debts. The idea is that everything should not be taken from you if you file a bankruptcy, because then you would have a very difficult time getting back into the economic mainstream.

This is the theme sounded by the sponsor of this legislation, state Senator Richard Devlin of Tualatin, when he said:

“This bill will help some struggling Oregonians get back on their feet and recover from the effects of the worst economic climate we’ve seen since the Great Depression.” “By passing [this bill] we will be able to help some Oregonians remain employed or restart their businesses, allowing them to be contributing members of our economy.”

In some professions, trades, or businesses, $5,000 worth of business assets may be plenty. In others—say if you’re a machinist who owns all your own tools or you run a retail business with a lots of store fixtures, $5,000 may still seem insufficient. But because of the following considerations, that amount may well cover more than you’d think.

1) Exemptions only apply to your equity in these tools and equipment. For exemption purposes, you do not own an asset to the extent you owe money specifically on that asset. So if you had machinery worth $10,000 but owed $7,500 on a debt legally secured by that machinery, then you would only “own” the difference, $2,500. That would be well under the $5,000 exemption, so you could keep that business equipment and not have to surrender it to the bankruptcy trustee (although you would have to keep up your payments to that secured creditor).

2) For bankruptcy purposes, assets are valued based on their present liquidation value, in their present condition, not on their original cost. In many situations, business assets that may be extremely valuable to you have much lower liquidation value than you would think. Some equipment holds its value relatively well—especially if it was bought used, is good quality, and has been well cared for. But many kinds of equipment have marketable values of “pennies on the dollar” compared to what you paid for them.

3) The tools of trade exemption applies to each person, so if husband and wife both operate or own a business and both file the bankruptcy, they can combine their exemption to total $10,000. If they operate the business together but only one person files the bankruptcy, the person filing likely owns only a half-share in the business, allowing him or her to apply the $5,000 exemption to that half interest, in effect protecting $10,000 worth of business assets.

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