Assets Exceeding Exemptions in Ch7 - Buyouts

[MikeW]

I've read that if assets exceed exemptions available, then that precludes one from filing ch7. But I'm also seeing the term "buyout" used here and there in regards to a ch7. I'm wondering how that works in practice.

Let's say, hypothetically, that Bob has property:
- auto: $1,500 FMV, free and clear
- clothing and personal items: $1,500
- Bob's 25% share of the assets in a business: $7,000

Exemptions in Florida:
- auto: $1,000 equity
- clothing and personal items: $1,000
- wildcard (if not taking homestead): $4,000

So Bob exceeds the exemptions available in Florida by $4,000 - with $500 over on the auto and $500 over on personal items. The business assets can't be liquidated because other parties are involved.

In this scenario, would a ch13 be required? Or could a "buyout" be arranged for the $4,000 overage? If so, how does a buyout typically work? I've been looking, but I haven't been able to find any examples.

Thanks!
MikeW

[AngelinaCat]

Sometimes it isn't possible to do a Ch13. We had been trying for a Ch13, even though the pre-filing credit counselor went to said that with our income and outgo, that we were better suited to a Ch7. When I lost my FT job, then we had no choice but to file a Ch7.

Because we were over our exemptions, we were ruled an Asset Case. In our case, the three automobiles and the real property were formally 'Abandoned Interest' in by the trustee, because they "were either too old, or fully-encumbered by mortgages, and/or exemptions".

For the other things, the trustee offered us a chance to purchase back our non-exempt items from the BK Estate, before he posted them for auction. As most of these were some family heirlooms, and 'Hub's computers ('tools of the trade' is not allowed in Florida), we jumped at the chance. The trustee offered an amount that was discounted, with no interest, for 12 monthly payments. We were able to afford this and so so took the deal. Our payments were $450.00 a month, making a total of $5400.00. As I said, the trustee gave us a discount, as our overage was 6K.

I hope that helps.

[LadyInTheRed]

I've read that if assets exceed exemptions available, then that precludes one from filing ch7.

That's not true assuming the debtor otherwise qualifies for a Chap 7. Having non-exempt assets only preculudes a Chap 7 if the debtor is unwilling to risk giving up the non exempt assets.

The business assets can't be liquidated because other parties are involved.

I don't think that is true. I am not certain, but I believe a trustee can liquidate the business and give the other owners their shares. The trustee would probably first give the other owners the opportunity to buy out the debtor's share.

Based on what I've read, AC's experience seems to be pretty typical of what happens in a Chap 7 asset case.

A bankruptcy attorney who is familiar with your local trustees should be able to give you an idea of what a trustee is likely to do about your particular assets.

Filing a Chap 13 only to keep $4,000 in non-exempt assets does not seem very wise to me.

[DeadManCrawling]

Just taking the numbers from your example:

There is a 99% chance Bob has overvalued his personal belongings and possibly his interest in the business.

Things like clothing, used computers, TV's, and typical household items are virtually worthless in the real world. Most of us tend to think of these items in terms of what we PAID for them. The BK method of evaluating most of these things (not including truly rare things like antiques, artwork by known artists and so on), is to use junk sale prices. If you stopped the first person on the street and asked them what they'd give you "on the spot" for your stuff. The number isn't much.

Similarly, an interest in a business may be of value, or may be worthless, even if the business is producing income. The income you receive IS income and potentially an asset, but can be protected in a number of ways, including the sort of generous "Head of Household" exemption, which covers banked wages (up to six months worth), up to a certain number.

Shares owned in the company are regulated by state law and by how the company was incorporated. It may be that your shares are already protected in a variety of manners.

It sounds like you may be at the beginning of this BK road. I suggest you use the search box on this forum and enter terms that you think relate to your situation. There are huge numbers of posts that may answer some very specific questions, and even point you to questions you didn't even know you should be asking.

Good luck, and always feel free to ask more questions. It can be overwhelming at first, but educating yourself will make it not just manageable, but even a relief.

Best,

-dmc

[helpmeout]

Define the clothing and personal items. Because chances are very good that that is overvalued.

[AngelinaCat]

Almost EVERYTHING is 'overvalued'. You have to look at very bottom yard sale prices. Look at what Goodwill, Salvation Army, and your local thrift stores are charging for things. THEN go to your local yard sales and compare prices.

[MikeW]

Sometimes it isn't possible to do a Ch13. We had been trying for a Ch13, even though the pre-filing credit counselor went to said that with our income and outgo, that we were better suited to a Ch7. When I lost my FT job, then we had no choice but to file a Ch7.

Because we were over our exemptions, we were ruled an Asset Case. In our case, the three automobiles and the real property were formally 'Abandoned Interest' in by the trustee, because they "were either too old, or fully-encumbered by mortgages, and/or exemptions".

For the other things, the trustee offered us a chance to purchase back our non-exempt items from the BK Estate, before he posted them for auction. As most of these were some family heirlooms, and 'Hub's computers ('tools of the trade' is not allowed in Florida), we jumped at the chance. The trustee offered an amount that was discounted, with no interest, for 12 monthly payments. We were able to afford this and so so took the deal. Our payments were $450.00 a month, making a total of $5400.00. As I said, the trustee gave us a discount, as our overage was 6K.

I hope that helps.

Thanks AngelinaCat. That helps a lot actually. I had seen a few threads that mention "buyouts", but no mention of how the buyouts actually worked. This might sound like a silly question. Did the trustee physically take hold of any of the equipment? (or do anything else that might hinder the ability of the business to function?)

Based on what I've read, AC's experience seems to be pretty typical of what happens in a Chap 7 asset case.

Thanks LadyInTheRed. So what I'm gathering from all this is that trustees will typically work with you, allowing you to buy your stuff back on a payment plan. But you can't count on it either. And that's where an experienced local attorney is needed.

I don't think that is true. I am not certain, but I believe a trustee can liquidate the business and give the other owners their shares. The trustee would probably first give the other owners the opportunity to buy out the debtor's share.

Jeez, I didn't think the trustee had that kind of power. In my hypothetical, I wanted to present a scenario where it would be impossible to liquidate the overage. I thought 25% ownership would be low enough to preclude liquidation. If not, then I wonder where that line would be drawn? If Bob owns Microsoft stock equaling an ownership share of 000001%, obviously they are not going to liquidate Microsoft's assets to satisfy Bob's ch7. But what is the difference? Participation? Maybe the term "material participation" is sprinkled in there somewhere. Even then, it doesn't sound fair to dissolve a corporation because a 25% owner files ch7. It's an interesting question.

In my real-life non-Bob scenario (thread here: http://www.bkforum.com/showthread.ph...in-the-Picture), the overage is going to be a combination of cash and inventory. Now I'm wondering how inventory will be valued. You'd think they would be smart enough to use historic cost, not salvage value. In my case, new inventory is always coming in. So if I'm stocking up on some items consistent with "ordinary course of business", the payments shouldn't be ruled preferential. If salvage value were used on those items, it would certainly work in my favor. I can't imagine it working like that though. That would be another good question for a local attorney.

Having non-exempt assets only precludes a Chap 7 if the debtor is unwilling to risk giving up the non exempt assets.

This might be what it comes down to with me. If there is any risk of physically relinquishing my inventory, then I won't be able to file ch7. As long as I can work out a payment plan and hold onto my inventory, I should be fine. Yet another question for a local attorney then.

Similarly, an interest in a business may be of value, or may be worthless, even if the business is producing income. The income you receive IS income and potentially an asset, but can be protected in a number of ways, including the sort of generous "Head of Household" exemption, which covers banked wages (up to six months worth), up to a certain number.

Thanks Deadman. Sorry to make you rehash a lot of what you already told me. (I'm the guy you've been helping with the s-corp: http://www.bkforum.com/showthread.ph...in-the-Picture.) This is interesting, the Head of Household exemption. I never thought about exemptions covering income. I'll have to look into this.

Define the clothing and personal items. Because chances are very good that that is overvalued.

Almost EVERYTHING is 'overvalued'. You have to look at very bottom yard sale prices. Look at what Goodwill, Salvation Army, and your local thrift stores are charging for things. THEN go to your local yard sales and compare prices.

Thanks guys. Sorry, I should have been more clear about the scenario only being hypothetical. The exemption amounts were overinflated in order to present a scenario with overages of $500 in the personal property category, $500 in the auto category, and $4,000 total overage. I wanted to see how such a scenario would be handled by a trustee.

I really appreciate all the help I got here. In the future, I'll be more careful not to post a question so close to when I have to leave for work. Unfortunately, I don't have a smart phone I can use for online stuff while I'm out delivering pizzas. That's something I haven't jumped on board with yet. I think I'm about the last guy to hold out. I look around the store when orders are slow and to the last person, everybody's face is buried in his phone. I'm not even complaining about that either. It just makes somebody my age more valuable as an employee.

Thanks!
MikeW

[frogger]

Jeez, I didn't think the trustee had that kind of power.

Thanks!
MikeW

Never underestimate the power of a bk trustee.

[AngelinaCat]

Thanks AngelinaCat. That helps a lot actually. I had seen a few threads that mention "buyouts", but no mention of how the buyouts actually worked. This might sound like a silly question. Did the trustee physically take hold of any of the equipment? (or do anything else that might hinder the ability of the business to function?)

No, he didn't. But we didn't know whether he would or would not. By this time, neither the attorney nor her assistant, were answering questions. 'Hub had a small computer consulting business, and we lived in dread that his computers were going to be picked up. While he only had a few customers, it helped pay some bills.

[LadyInTheRed]

I thought 25% ownership would be low enough to preclude liquidation. If not, then I wonder where that line would be drawn? If Bob owns Microsoft stock equaling an ownership share of 000001%, obviously they are not going to liquidate Microsoft's assets to satisfy Bob's ch7. But what is the difference? Participation?

If Bob owned Microsoft stock, or any stock that would be marketable to the public, the trustee would sell the stock. The problem with a hypothetical is that you have to look at the specific facts of the situation to guess what the trustee might do. The trustee will look at the specific business and decide what makes sense. Change a fact in your hypothetical and the trustee might make an entirely different decision.

[keepsmiling]

If it makes you feel any better, we only have dumbphones here too. I look forward to the day I have the extra cash to pay for the service for a smart one. First thing I do when I get home is head for the computer to visit with my community here

[MikeW]

No, he didn't. But we didn't know whether he would or would not. By this time, neither the attorney nor her assistant, were answering questions. 'Hub had a small computer consulting business, and we lived in dread that his computers were going to be picked up. While he only had a few customers, it helped pay some bills.

That had to pretty stressful. I'm sure if the trustee came to inspect your assets, he would have questioned the customer's equipment that your husband was working on. It would have looked like you were hiding assets. That wouldn't have been fun.

If Bob owned Microsoft stock, or any stock that would be marketable to the public, the trustee would sell the stock. The problem with a hypothetical is that you have to look at the specific facts of the situation to guess what the trustee might do. The trustee will look at the specific business and decide what makes sense. Change a fact in your hypothetical and the trustee might make an entirely different decision.

That makes sense. I really do need to schedule another appt with an attorney.

[LadyInTheRed]

Oh yeah, I forgot to say: My husband and I still have dumb phones too. There are times we wish we had smart phones. But we just can't bring ourselves to pay those service fees even though we probably could fit it into our budget. Our 6 year old flip phones do just what we got them for: make telephone calls.

[MikeW]

It's definitely a generational thing. If you're in your twenties, it's not even an option. A smart phone is a bare necessity, like food and shelter. You would cut off your power before you cutoff your smart phone.

[Indigosage]

Twenty something here...and Mike is right, it is blasphemous not to have a smartphone anymore.