On March 25, 2021, the United State Justice Department issued a “NOTICE TO CHAPTER 7 AND 13 TRUSTEES REGARDING TREATMENT OF RECOVERY REBATES AND TAX CREDITS FOR CONSUMER BANKRUPTCY DEBTORS UNDER THE AMERICAN RESCUE PLAN ACT OF 2021.” You can read it here.
In the Notice, the DOJ says that:
Chapter 7 and 13 trustees should not consider recovery rebates or child tax credits in administering estate assets or calculating disposable income in chapter 13 repayment plans.
What this means is that:
the money is not an asset (so the bk trustee cannot take it in a 7 or a 13), and
it doesn’t count as income (so it doesn’t increase your chapter 13 plan payment)
Basically, this money was intended to help families, and they get to keep it. It doesn’t help families for a bk trustee to take it, pay creditors, and charge a healthy service fee to debtors for the privilege of taking and administering their money.
But you still need to list your personal assets and value them. If you don’t, it can be bad.
When you file bankruptcy, your bankruptcy estate is created. The bankruptcy estate is all of your real and personal property, like your clothing, your car, and your home. It is the bankruptcy trustee’s job to review the estate and take any assets of value and sell them for the benefit of your creditors. (In a chapter 7 the trustee sells them. In a chapter 13 the trustee requires that you pay their value to your creditors over a 5 year plan).
Most of your property is exempt, or protected. For example, in Utah, state law protects the following from creditors (and trustees) , Utah Code 78B-5-505:
78B-5-505 Property exempt from execution. (1) (a) An individual is entitled to exemption of the following property: … (viii) (A) one: (I) clothes washer and dryer; (II) refrigerator; (III) freezer; (IV) stove; (V) microwave oven; and (VI) sewing machine; (B) all carpets in use; (C) provisions sufficient for 12 months actually provided for individual or family use; (D) all wearing apparel of every individual and dependent, not including jewelry or furs
So no, the trustee cannot take the shirt off of your back. Now if your shirt is made of mink and studded with diamonds, there may be an issue, but I’m betting that you’re not that stylish.
If you do not list your assets, you are committing fraud. It’s usually not actionable fraud, because forgetting to list your clothing is a “de minimus” mistake (literally “of minimum” or “a trifle”). But the trustee is going to ask you to amend your paperwork and list your personal assets, like the shirt on your back. And, most of the trustees in Utah will look at your attorney and say, “Counsel, either you’ve failed to do due diligence on this case, or else your client is a nudist borrowing a friend’s clothing for the meeting. Please amend the schedules accordingly.” It is funny when it happens, and it’s happened to all of us, but it still makes you look sloppy.
Honestly, I calculate it while muttering, “tsk, tsk, tsk” and telling my clients that maybe they do not want to file bankruptcy right now.
Basically, if you have too much equity in your home, you’re going to have to pay your creditors something. In a chapter 7 the bk trustee will sell your home and use the money to pay your creditors. In a chapter 13, you keep the home, but the bk trustee will have you pay that exposed equity back to creditors over a 5 year plan.
This doesn’t mean ALL of the equity, just the exposed equity. Depending on where you live, your state offers a homestead which protects some of your equity. For example, in Utah, you can protect $43,300 of equity for each person on title for the home. So if your home has $40,000 of equity, you won’t lose it because there’s no exposed equity. However, if your home has $100,000 of exposed equity, only $43,300 of that is safe. The rest of the equity will need to be paid out to your creditors. That exposed equity can be paid out by selling the home or by filing a 5 year repayment plan in a chapter 13.
If you had the same home in Texas, 100% of the equity is safe (protected), so long as your home doesn’t sit on more than 10 acres. The Texas homestead exemption is huge.
Here is a depressing email exchange I recently had with a potential client (in which I recommend that instead of paying me to go bankrupt, that he should try debt settlement or consolidation instead).
Are we still going to be ok with the house in this crazy market? I know we talked previously on the phone and you had originally thought yes we would be ok. Is that still the case?
Let me know, thanks
Signed, A POTENTIAL CLIENT WHO IS GOING TO HATE MY RESPONSE
Robert Payne <firstname.lastname@example.org> 2:07 PM (13 minutes ago)
As for the house, I think we have a giant problem.
You told me it’s worth about $520,000 and we owe about $480,000 (Who is the mortgage lender, when did you take it out, and what is the balance?). This would give you $40,000 of equity. Under Utah law, I can protect $42,700 of equity for husband and another $42,700 of equity for wife, or about $85k of equity. If the house is worth $520,000, it is perfectly safe in a chapter 7 or a chapter 13.
However, when I look at the county tax assessed value, it puts your home at $690,500 (jumped from $584,100 in the last month with the new 2021 assessment). If I look at Zillow, it puts the home value at $774,731.
I need to know what the mortgage balance is, when you took it out, and who the lender is. Do you have a second mortgage attached to the property?
Chapter 7 With these numbers, you do not want to file a chapter 7. In a chapter 7, the bk trustee sends his realtor to look at the property. If he can sell it for enough to pay you your protected $85k and pay creditors anything, then the bk trustee will sell the home.
Chapter 13 In a chapter 13, the bk trustee will go off of the property tax assessed value of $690,500. Here is how the calculation would work: 690,500 (home value) – 480,000 (1st mortgage) = 210,500 of equity.
Then the trustee subtracts the following amounts 210,500 (equity) – 85,000 (homestead exemption) = 125,500 exposed equity.
Then the trustee subtracts proposed realtor’s fees/commission in a proposed sale (but does not sell it) 125,500 (exposed equity) – 41,430 (6% realtor’s fees on the sale of a home for 690,500) = 84,070.
This means that in a chapter 13, we have $84k of exposed equity. To keep the home, you would have to pay $84,000 over 5 years to your creditors to wipe out the unsecured debt like credit card debt. This would make your chapter 13 plan payment at least $1,400 a month for five years (plus another $250 or so to cover attorney’s and trustee’s fees)
Best route to take If you file bk, you either lose the home or lock yourself into payments of at least $1,650 a month for 5 years to keep the home. You may want to talk to a debt settlement or debt consolidation place first to see if there is any way of doing this without paying back at least $84k to creditors.
However, all of this depends on how much you actually owe on the home. If there is a second mortgage, or secured home equity line of credit, it may eat away at that equity and lower your payment substantially.
Robert P.S. The homestead has been updated to $43,300 for each of you, which protects another $1,200 of the home’s equity.