23 Oct Unwritten bankruptcy exemptions benefit debtors
There are two alternate sets of California bankruptcy exemptions found in the Code of Civil Procedure. The state law exemptions, for instance, permit the debtor to keep $2550 in equity in vehicles, while the California bankruptcy exemptions allow $3300.
But the unwritten bankruptcy exemption is added to those numbers: that “exemption” is the cost to the bankruptcy estate of administering that asset in order to turn it into cash that can be distributed to creditors. Suppose your car was worth, say, $4300, a thousand dollars more than the bankruptcy exemption available.
To turn that non exempt value into cash, the trustee has to pick up the car and arrange for its sale, and then pay you the amount of your exemption. Say it costs 10% of an asset’s value to arrange the sale.
Then, she has her expenses of administration to pay before she pays creditors. Her commission is 25% of the first $5000 she handles. So the $1000 of non exempt equity shrinks by the trustee’s commission. In our example, then $1000 less $430 costs of sale, less $250 commission. The banruptcy estate now holds $320.
In order to distribute that amount, the trustee has to examine the claims filed in the case to determine which creditors should share in the magnificent sum of $320.
When a trustee is dealing with real estate, the calculation has to also include any taxes that the sale of the property will trigger. Those taxes incurred by the bankruptcy estate in reducing an asset to cash must be paid before the pre bankruptcy creditors get anything. So, again, the phantom exemption increases in value.
The moral of the story is that trustees are instructed only to administer assets where there is a meaningful benefit to creditors. If there is not such a benefit, the asset is abandoned to the debtor, and the debtor keeps a car with value greater than the written exemption. The bankruptcy exemption is greater than you think.
Image courtesy of hohohob
Cathy Moran, Esq.
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