The new bankruptcy law, BAPCPA (“Bankruptcy Abuse Prevention and Consumer Protection Act”) requires that a debtor’s assets must be valued at “replacement cost.” In fact, if you meet with your attorney, he will give you a notice required by section 527(c) of the Bankruptcy Code, which probably explains valuation similar to this section from the disclosure form I use:
(1) HOW TO VALUE ASSETS AT REPLACEMENT VALUE:
You must determine how much your personal property is worth as it is today. Do not value your property based upon what you can sell it for. Instead, value it at what you would have to pay to replace it. If your property is new or close to new, consider retail value adjusted to whatever extent appropriate for the amount the property has been used. If there is a market for your property as used, you may use that market to determine value. For example, you may consider using thrift store prices or prices at house or garage sales or at a secondary marketplace such as eBay to determine what it would cost you to replace your personal property. [emphasis added].
The notice has always been a bit puzzling to me. On one hand it says, “do not value your property based upon what you can sell it for.” And on the other hand it actually mentions “house or garage sales.” Huh? Isn’t that what I could sell it for?
Prior to BAPCPA going into effect, I routinely told my clients to value their “stuff” at garage sale values. I now tell them to value it at what I call “Goodwill Store value.” In other words, what would their couch, chairs, dining room table, and so on, sell for at a retail store selling used goods? I have a theory that it would be strangely similar to what the item would sell for at a garage sale, but, maybe not. Maybe Goodwill or a consignment shop can get the item sold at a slightly higher price.
The bigger issue is: what does it matter? Every time I think about valuation-and I mean valuation of anything at all: real estate, stocks, bonds, sofas, dining room tables, guns-I think back to a story about a law professor at the University of Michigan law school who taught in the 1940s. Anytime he discussed valuation, he took his pen and tapped on the podium while staying over and over, “the worth of a thing is the price it will bring…the worth of a thing is the price it will bring…the worth of a thing is the price it will bring.”
By the end of the class, the students understood valuation. And the fact that I am now, in 2009, still using that wise professor’s statement is a testament to his legacy as a great teacher. What was true in the 1940s is just as true in 2009. Sure enough, the worth of a thing is the price it will bring.
How does this relate to bankruptcy law under BAPCPA? There are two things to understand when discussing valuation in bankruptcy: (1) Disclosure and (2) Reality.
First, let’s be perfectly honest. We really have no idea what most of our “stuff” is worth. For cars we can start with published guides like the NADA or Kelly Blue Book. For real estate, we can look at “comparables” to help us choose a value. But how much is my used TV worth? I have no idea. I’ll just guess and say $500. Maybe I’ve even looked at eBay as the disclosure form suggests.
Let’s say my TV sells between $400 and $600. $500 would be a pretty good guess. I could then go through the property I have and come up with estimates. Some items I could find on eBay; others I would not be able to find. So I start to guess. $400 for this, $30 for that, and so on.
Let’s say I’m valuing household goods. Maybe I add up everything in my house and my best guess is that my goods are worth $4,000. To be safe, I would usually add some to the valuation. I might think that the property is worth $4,500 in the “worth of a thing is the price it will bring” sense, but I’d probably state the value at $6,000 or so-maybe even more. Likewise, if I have a collection, or some unique item, I would list the item and state that I am unsure of the value of the item.
Why? Because if I ever make a mistake in valuation, it most certainly won’t be viewed as an honest mistake. The Trustee, United States Trustee’s Office, and maybe even the judge if the matter gets before her, will give me the look I call a “second shooter-on-the-grassy-knoll” look. In other words, they may suspect that the mistake was a deliberate result of a conspiracy between the debtor and his attorney. Then, the debtor and I have real problem. Lying on bankruptcy schedules is a federal crime, and it can also give rise to a denial of discharge, which is the order from the court stating that the debts are no longer owed. Think of the discharge as the Holy Grail of the bankruptcy quest.
So when you make a disclosure as to the value of your property, always guess high. Guessing low can cause problems. And if you really don’t know, put that in your schedules as well.
We’ll discuss the second topic, “Reality,” in “Valuation of Assets in Bankruptcy: Does it Really Matter? (Part Two).”
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Last modified: October 22, 2012