Exempting the Pink Panther

[bornfree2]

Let's play a game: hypothetical thought experiment:

Debtor has a family heirloom jewel , the Pink Panther, that they value in Schedule A/B at $2000. Debtor uses exemptions and assigns an amount of $2000 in Schedule C.

Trustee learns of the Pink Panther jewel and finds its worth more. They feel if they auction it they could fetch more than $2000. So what happens next exactly?

From my research, the Trustee files an objection to the exemption and argue that the Pink Panther jewel should be sold off for benefit of creditors. Does the Trustee then demand turnover of the Pink Panther so they can have it appraised?

Debtor objects to the exemption objection. Then what? Debtor must prove to the court exactly what? That its not worth what the Trustee thinks they can fetch?

Well, lets continue and say Debtor being dutiful, hands over the Pink Panther. Trustee auctions it and sure enough it sells for $3000. Debtor is very sad to loose the Pink Panther family heirloom.

But how is Debtor then paid for the $2000 exemption they claimed. Does Trustee write a check to them? Or is this sent to the court and the Debtor has to deal with read tape to get that money out?

Lastly, it seems the only way Debtor could avoid the above scenario is to increase the exemption amount above and beyond what they think is fair market value. But it seems that since its an auction no one can really know.

So what would be the way to insure against an auction of the Pink Panther?

[justbroke]

A Chapter 7 Liquidation that a debtor filed... the debtor should know that property is at risk. Everything you wrote is how it works... objection... hearing... valuation... "liquidation" (sale)... proceeds.

Bankruptcy, and especially a liquidation, is about paying your creditors. If you have a painting worth thousands more than exemption value, then either buy it from the Trustee (at auction or offer a compromise)... or let it go.

If you file a Chapter 7 liquidation and have property then expect that you may need to liquidate (surrender) some of it. You are liquidating what you cannot exempt so that you save from paying your creditors in full. As I will always say, surrendering a $3,000 painting to discharge $1,000,000 worth of debt... is always worth it.

[bornfree2]

Bankruptcy, and especially a liquidation, is about paying your creditors. If you have a painting worth thousands more than exemption value, then either buy it from the Trustee (at auction or offer a compromise)... or let it go

If the Trustee has absolute right to auction an item despite its exemption claim, then whats the point of the exemptions? It serves no protection other than setting the starting bid price to try to discourage an auction from happening .. which is no big deal for the trustee to do.

Its also still unclear how money is passed back to the debtor. Is it claimed at the court in similar fashion that the state comptroller takes over unclaimed property?

[despritfreya]

What a debtor says an item is worth is not relevant. The Trustee can and will make his/her own independent evaluation.

If a debtor intentionally undervalues an item hoping a Trustee will walk away - once caught the debtor could face losing a discharge or, worse, criminal charges for bk fraud (or both).

Regardless of the bad acts of the debtor the USSC says a properly invoked exemption stands. See Law v. Siegel and its progeny.

I have seen way too many "smart" debtors regret their stupidity. If a debtor has an asset a debtor does not want to risk losing, a debtor does not file Chapter 7. End of story.

Debtors need to stop playing games as, when caught, they run the very real risk of ending up in Club Fed.

Des.

[bornfree2]

Debtor could value the Pink Panther based on what they understood it to be worth . Perhaps Debtor has a family friend jeweler that told them 'ah that Pink Panther your grandfather gave you is worth $2000 at least son. guard it well'. No fraud. No Club Fed.

Trustee claiming it is undervalued is just an opinion not some attempt to defraud. And both Debtor and Trustee can present their arguments. In that case Debtor would be wiser to get proper documentation and evidence to back up his assertions. Yet of course this is risky because Trustee has the edge in arguing for dismissal.

It depends on true grit. How much resolve will Debtor demonstrate to stand up against bullying and fear mongering tactics. They are well within their rights to fight to fight to exempt their property.

Exemption claiming a value well north of the original value estimation is also not an attempt at fraud. Its essential what a wildcard is designed for and why that '100% FMV' came about after the Siegel case.

I will do more research on how these kinds of hearings and objections go. There is not much i can find on RECAP because fighting it with a lawyer would cost more than the property in dispute. Like hiring a high priced lawyer for advice on a small claims court issue.

[justbroke]

These are valuation hearings. If the Trustee gets to a hearing on this, then they will hire an appraiser, obtain a written estimate of value, and the appraiser will testify as an expert at the evidentiary hearing.

What we are saying is that if it's a mistake... you still lose the painting.

What we are also saying is that if you attempt to defraud the bankruptcy estate... it could end badly.

Yes, many debtors try to undervalue things in hopes that all their property fits nicely into the exemptions. This is a bad idea and is why there are still a few Chapter 7 Trustee in Florida that just don't play the game; they send an appraiser in cases where the debtor claimed the homestead exemption.

[bornfree2]

"Yes, many debtors try to undervalue things in hopes that all their property fits nicely into the exemptions."

I dont understand how 'undervaluing' was brought into this discussion? Im arguing for 'over claiming' specific exemption amount (using wildcard credits) so the Debtor has insurance in the case if any property goes to auction the debtor will be justly compensated.

edit: Re-reading your first paragraph I can understand the approach they can use and prepare a defense in advance.

[justbroke]

"Yes, many debtors try to undervalue things in hopes that all their property fits nicely into the exemptions."

I dont understand how 'undervaluing' was brought into this discussion? Im arguing for 'over claiming' exemption amount (using wildcard credits) so the Debtor has insurance in the case if any property goes to auction the debtor will be justly compensated.

Overclaiming is in the opposite direction is undervaluing. In the end, the Trustee's job is to validate that the exemptions are accurate and the property valuations fit within those exemptions. Things that are undervalued and that don't fit within an exemption are subject to objection and liquidation by the Trustee. Why draw attention by over-valuing a TV worth $100 and say it's worth $1,000? That brings more unwanted scrutiny because, now, the Trustee believes that you have more expensive items.

I wouldn't overvalue something just for the sake of overvaluing. When filing bankruptcy, most debtors don't have major things of value so it's a non-issue. We use garage-sale prices or market value depending on the type of property. Whether or not the Trustee will decide to take a closer look is specifically in the job duties of the Trustee.

Suffice it to say this is another non-issue for the majority of debtors. About 95% of cases are no-asset and this is not something anyone dwells on.

[bornfree2]

Overclaiming is in the opposite direction is undervaluing. In the end, the Trustee's job is to validate that the exemptions are accurate and the property valuations fit within those exemptions. Things that are undervalued and that don't fit within an exemption are subject to objection and liquidation by the Trustee. Why draw attention by over-valuing a TV worth $100 and say it's worth $1,000? That brings more unwanted scrutiny because, now, the Trustee believes that you have more expensive items.

I wouldn't overvalue something just for the sake of overvaluing. When filing bankruptcy, most debtors don't have major things of value so it's a non-issue. We use garage-sale prices or market value depending on the type of property. Whether or not the Trustee will decide to take a closer look is specifically in the job duties of the Trustee.

Im sorry to belabor this point but i do not understand this idea of 'property valuation fits within exemptions'. Property value and a specific exemption amount claimed is two different things. The property is valued in Schedule A/B. The exemption amount claimed is in Schedule C. The amount claimed can covers the property above and beyond is value.

I am not talking about a $100 tv but something that is valuable to Debtor wants to keep - thus my hypothetical was framed in terms of a family heirloom jewel that has debatable value.

If Debtor originally estimates the Pink Pather was worth $2000, but claims $10,000 exemption - that in my mind - is insurance to keep it safe in auction and probably outside of a fair evaluation by an appraiser. Debtors exemption value sets the starting price of the auction (plus whatever trustee tacks on).

Will it invite scrutiny? I suppose so. I dont think it should but it is what it is. Im not plucking this strategy out of my imagination but what ive read in the legal books and case research ive come across. Though of course the fact that I read this in case law, means it did invite scrutiny and debtor initially lost in BK court but won in BAP appeal...though there are also case where they lost.

Again this strategy can very soon suffer from a sunk cost fallacy. Im merely 'war gaming' a hypothetical.

[despritfreya]

These are valuation hearings. If the Trustee gets to a hearing on this, then they will hire an appraiser, obtain a written estimate of value, and the appraiser will testify as an expert at the evidentiary hearing.

JB - It is extremely unlikely for there to be a valuation hearing when determining if there is non-exempt value for the estate. This is how it typically works:

• Debtor believes the exempt (or non-exempt) asset has no value to the estate. The technical phrase is that the asset is "burdensome and of inconsequential value to the bankruptcy estate" and therefore should be abandoned.
• Debtor asks the Trustee to abandon the asset.
• The Trustee either says "yes" or "no" to the request.
• If the answer is "no" and the Debtor wants to go down the path of abandonment, he/she files a Motion to Abandon (paying the required filing fee and noticing the Motion to all creditors and interested parties on a "bar date" notice - the noticing aspect depends upon local procedure).
• The Trustee (or any creditor) either responds or does not respond to the Motion.
• If no response, the Court enters an Order abandoning the asset.
• If the Trustee (or some creditor) responds the Court sets the matter for Hearing (again - look at local procedure).
• At the Hearing the Court will most likely either continue the matter so that the parties can come to some agreement or direct the Trustee to market the asset to see if it can be sold (Debtor gets the exemption amount at time of sale).
• Typically the Court will give the Trustee several months - whatever the judge deems to be "reasonable" - in which to find a buyer and, if no buyer is found, will authorize the abandonment.

Of course, this all depends upon local procedure. A mini trial on valuation is not utilized as it is costly and ineffective since, "value" is what someone will pay for the asset not what some "expert" says it's worth.

Des.

[justbroke]

despritfreya interesting on the process. I have been in valuation hearings but only in the Chapter 13 context for lien stripping, and only in Chapter 7s for issues related to redemption. Thank you for the clarification the difference when it comes to exemptions. I'm learning!

[bornfree2]

@despritfreya - great post. anything to decipher the procedure is of great aid for war gaming possible moves and outcomes. Motion to abandon fee is $188. It soon becomes apparent what property is just not worth fighting to keep. Especially if it will prolong the case and bring too much unwanted attention.

[despritfreya]

great post. anything to decipher the procedure is of great aid for war gaming possible moves and outcomes. Motion to abandon fee is $188. It soon becomes apparent what property is just not worth fighting to keep.

I don't like the word "gaming". Trying to game the system will just lead to disaster - hence the reason my Firm makes a lot of money attempting to clean up the mess those "smart" people create when doing something stupid.

As to a request for abandonment - one must be careful. I am following a case right now where the attorney (yes, the attorney) filed a Motion to abandon the homestead just 1 month into the case. Stupid. It takes a Trustee a lot more than 1 month to investigate so, naturally, the Trustee is now wondering if there is more than $250k in equity in the property. The Trustee objected to the request. A Hearing on the Motion was held last week and the judge continued it for 60 days. Now that the Trustee has keyed into the issue, you can bet he/she is watching and the home will have more equity 60 days from now (assuming the market doesn't collapse).

In one of my cases my client and I made the decision not to raise the red flag. The case was an asset case. 1.5 years into it, the home had more equity than the allowed exemption. We never requested an abandonment and, in the end, the trustee forgot about the home and closed out the case after distributing the money that was collected from other assets. We could have filed to abandon 6 plus months into the case but, knowing that the market was taking off, we did not want to open the door. The decision to do nothing worked. As a side note: had the Trustee looked into the property, my client would have settled with the Trustee by kicking into the bankruptcy the non-exempt value - probably with a "cash out" refinance.

Des.

[justbroke]

As to a request for abandonment - one must be careful. I am following a case right now where the attorney (yes, the attorney) filed a Motion to abandon the homestead just 1 month into the case. Stupid. It takes a Trustee a lot more than 1 month to investigate so, naturally, the Trustee is now wondering if there is more than $250k in equity in the property. The Trustee objected to the request. A Hearing on the Motion was held last week and the judge continued it for 60 days. Now that the Trustee has keyed into the issue, you can bet he/she is watching and the home will have more equity 60 days from now (assuming the market doesn't collapse).

This illustrates the concern I had with "overvaluing" something to try to hedge on the valuation... could bring unwanted or unwarranted attention.

Yet another reason to hire an experienced bankruptcy attorney.

[bornfree2]

Not sure what word or term lawyers use for 'playing out scenarios' but that is what i meant by 'war gaming'.

Negotiation is certainly an area I need to mature in. I think its easier for a lawyer to do this on behalf of their client because they are not emotionally invested. Naturally if someone comes after my life/property my gut reaction is defensive.

I do see wisdom in losing some property in return for winning the prize of larger debt cancelation. But you know the old saying 'give an inch, they take a mile'...