Asset Values and Bankruptcy, Part 1

You need to state a good-faith value of your assets in your bankruptcy papers. I instruct my clients to use a liquidation/tag sale/auction/pawn shop value, since the real issue is what a trustee could get for your property for your creditors.

The Chapter 7 trustees are acutely aware of the costs of sale, perhaps cleaning charges and certainly sales commissions. Even before those are the exemptions to consider, the protected values of your assets which you would be paid if an asset is sold. Then the sales commissions, etc, and then there is the need to pay the trustee herself for her work. Only after all these items is there anything left over to pay the creditors, and there is no joy in writing insignificant checks to each creditor. For these reasons, in my experience a trustee looks for at least a $2,000 recovery over the exempted amount before beginning to consider selling an asset.

A Chapter 13 plan must pay at least the amount your creditors would get in a hypothetical Chapter 7 filing.  This is called the liquidation test, or the best-interests-of-creditors test.  Liquidation values are compared with the exemptions and hypothetical costs of a Chapter 7 liquidation (including trustee fees) to get to this amount.

There are two exceptions to the use of liquidation value, which I will discuss in Part 2.

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