Recently, I was talking with a colleague who was wondering if there was anything that could be done on a particular case. His potential client had a significant amount of debt. But, there was also an asset that had significant value. If the debtor filed a chapter 7, the chapter 7 trustee would sell that asset and use the cash to pay creditors. If the debtor were to file a chapter 13, the debtor would have to pay the excess equity through the plan to his unsecured creditors. But the debtor could not afford to pay that excess equity through the plan. My colleague was asking if there was anything else? I assured him that he had not missed anything.
Just to catch up, in bankruptcy, a debtor is allowed to keep a certain amount of property. This is called exempt property. Any property that a debtor has over what is allowed to be kept as exempt is, in a chapter 7 case, sold and the proceeds used to pay creditors. So, if you have a bass boat stashed behind your brother-in-law’s shed that is worth $10,000 and you have used up all of your exemptions, if you file a chapter 7, the trustee is going to sell your bass boat to pay your creditors.
In a chapter 13, the chapter 13 trustee will not sell your bass boat but he or she will insist and the court will require that you pay your unsecured creditors through your chapter 13 plan an amount equal to the value of your bass boat. That is because, in a chapter 13, your unsecured creditors must receive what they would have gotten had the bass boat been sold in a chapter 7 if it is non-exempt. This is called the best interests of the creditors’ test.
The point behind all this is that my colleague was desperately trying to find a way to help his client get out of debt without losing a very valuable asset. While, as bankruptcy lawyers, this is what we do, the law is such that bankruptcy cannot fix everything without some pain. As far as the bankruptcy court is concerned, if you, as the debtor, turn over your non-exempt assets to be sold in order to pay to your creditors, the court will then eliminate or “discharge” any remaining debts that you cannot pay. To put a finer point on this, if you owe $50,000 in credit card debt, getting out for selling your $10,000 bass boat and using that money to eliminate all of your debt is a good deal (20% payout?).
My point back to my colleague was that lawyers cannot fix everything and that bankruptcy cannot fix everything. A debtor has debt. A debtor also has assets. Bankruptcy allows a debtor to minimize the damage from having too much debt but not necessarily eliminate all of the damage (or pain). Bankruptcy also allows a debtor to prioritize the items that are important to him or her and allocate the scarce resources (money) to retaining those prioritized assets.
Bankruptcy is a powerful tool for dealing with too much debt–probably the most powerful tool. But, it is not necessarily the tool that will fix every financial problem. It has some limitations of which a debtor should be aware.
If you are facing issues with too much debt, consult with an experienced bankruptcy attorney near you.