Often prospective clients come to our San Jose offices for a free bankruptcy consultation armed with legal “expertise” they have garnered from sites pertaining to bankruptcy all over the internet. One of the principle fears that these folks convey to me is the idea that if they file Chapter 7 bankruptcy, they will lose everything because they have heard that Chapter 7 entails having to give up all of their property to the Bankruptcy Court in exchange for a discharge of their debts. This is simply not true.
It is true that when a debtor files Chapter 7 or 13 bankruptcy, all of his assets become known as the “bankruptcy estate.” In Chapter 7, the trustee assigned to the debtor’s case “owns” all of the Chapter 7 debtor’s assets in that bankruptcy estate. This could range from anything to a house, a vehicle, clothing, jewelry, electronics, and the like. However, and this is the most important point, just because the debtor’s property is included in the bankruptcy estate does not mean that she will lose it! In Chapter 13, the trustee cannot take any of the debtor’s assets. And, as I’ve written about in previous posts, the California bankruptcy exemptions allow Chapter 7 bankruptcy debtors to keep up to certain allotted dollar amounts of assets that they may “exempt” from the bankruptcy estate. This means the Chapter 7 debtor will be allowed to keep such exempt assets after the bankruptcy case is closed. So, in this post, I’d like to address the all-important question of how to determine how much your assets are actually worth?
The Bankruptcy Code requires that debtors value their assets at “replacement value.” What does this mean? For items such as a house or vehicle, this shouldn’t be too difficult to figure out. There are many tools such as Kelly Blue Book or the NADA guides that can get you a reasonable estimate of the value of your vehicle, given the current condition that it is in. Likewise, online valuation websites such as Zillow or Eppraisal look at recent home sale comparables to get you an idea of what your home is worth, or you can get an actual, licensed appraiser to value your property.
It’s easy enough when there are readily available concrete guidelines for your property, but what about your dining room set that’s eight years old, or your diamond ring handed down from your great-grandmother, or that big screen television that has all the bells and whistles and was top of the line – in 2004? The best way to come up with a valuation is not to think of how much you paid for a particular item back when you bought it, but rather, how much could you reasonably get for it on the open market today. Or, if it were gone, how much would you pay for a replacement of similar age and wear and tear. You can ask yourself, “how much would I be able to sell this item for were I to sell it at a garage sale, or on a secondary market such as eBay or Craigslist?” The answer to that question is likely the amount that your property is worth at replacement value.
More difficult assets to value are often intangible assets such as copyrights, patents, and business “good will.” These are notoriously difficult to value, and one expert may arrive at a very different value than another expert. As for the value of small businesses in bankruptcy, as I’ve previously posted to this blog, depending on the type of business, the net book value or liquidation value of the business’s assets is generally accepted so long as the business is not of a kind that can easily be taken over by the trustee and run in a “turn key” fashion. Personal service businesses, in particular, are generally not worth more than the combined book value of their hard assets for Chapter 7 bankruptcy purposes, because the trustee cannot readily step in and run the business of a hairdresser or insurance agent or plumber.
One word of caution: although the Chapter 7 bankruptcy debtor is responsible for providing replacement values for his or her own property for the purposes of filing a bankruptcy case, these values must be made in good faith with reasonable inquiry into the fair market value of these assets. An experienced bankruptcy attorney will help you dig into these values and point you to where you might obtain such values. To knowingly provide false information on a bankruptcy schedule may constitute perjury and a federal crime, and is simply not worth it. When in doubt, it’s probably better to err on the side of caution and overestimate rather than underestimate the value of your assets in Chapter 7 bankruptcy.
As this is a broad and complex part of bankruptcy law, anyone considering filing Chapter 7 bankruptcy, should get advice from an experienced debtors’ bankruptcy attorney.