a training lesson for professionals who prepare bankruptcy petitions
In my opinion, there is a deal breaker in almost every bankruptcy petition that I am involved with. What do I mean by a deal breaker? It is the one debt or asset that causes one unique problem within a bankruptcy petition to create a catastrophe.
Let me give you an example: Last week an attorney sent us a bankruptcy petition to prepare for his law firm. After entering all the information and during the Finalization Stage of drafting the petition the virtual bankruptcy assistant discovered unexempt business assets in the amount of almost $95,000. The debtor owned his own liquor store. A recent inventory had revealed a $100,000 value. The state of New York had a maximum exemption allowance for business inventory of only $5,000. This left the debtor with $95,000 of UNEXEMPT equity.
Why is This Problem a Deal Breaker?
Because, when this bankruptcy petition is filed, the unexempt equity will become a debatable issue for all parties involved. This will cost the attorney, the court and the debtor extra time and possibly extra money. Why? Because the debtor is asking the court to forgive him of $328,000 of unsecure credit card debt plus allow him to keep $95,000 of unexempt equity as a bonus gift. This line of thinking is not fair for both sides and therefore, the creditor would normally file an Objection to the Discharge of this Chapter 7 petition. And if the debtor were filing a Chapter 13, the creditor would normally file an Objection to the Confirmation of the Chapter 13 Plan.
What is the Solution to the Problem?
The first suggestion I have in solving this situation is the easiest. First, find out if the business inventory is really valued at $100,000. In most cases, you will find that debtors always provide a high estimate of their assets. This is because debtors have a habit of not fully understanding the meaning of the term: market value. Market value is the amount the court could reasonably resell the items for in order to get money to pay the creditors. There is no benefit to the debtor if they overestimate a $100,000 inventory that can only be resold for a fair market value of $35,000.
Thus, using the $35,000 market value figure (and applying the $5,000 exemption allowance) the unexempt equity is lowered from $95,000 to only $30,000. That will makes a huge difference in how this bankruptcy case will play out. This is why I call these types of situations: Deal Breakers.
What if the Market Value Cannot be Lowered?
What will happen if you find out that the $100,000 figure is correct and the debtor really has $95,000 in unexempt equity? Basically, there is not much that can be done.
Now the subject becomes one that the attorney will need to handle. How the attorney handles this type of situation will be crucial in moving forward with this case. But face it; it is not easy to tell a debtor that he or she may lose their entire business inventory when they file bankruptcy. In fact, this type of news normally will cause a panic with the debtor. Therefore, this type of issue must be approached in a positive manner by the attorney or catastrophic events could arise.
Bad Example of Handling This Situation:
Attorney is told that there is $100,000 of unexempt equity in the debtors business inventory. Attorney calls debtor and tells him that he is could lose his business but he would not know until the court hearing. The result? The debtor panics. Who can blame them?
Good Example of Handing This Situation:
Attorney tells debtor that he has a total of $328,000 of unsecured credit card debt that will be erased if the bankruptcy petition is granted a favorable discharge. (Start with your strongest positive fact.) However, the issue the attorney is having trouble protecting the debtor from is the estimated $100,000 of unexempt equity in his business inventory. The attorney may tell the debtor that in the state of New York he is only permitted to keep a certain amount when he is asking the court to dismiss him from all his debt. (This shows that the attorney knows the bankruptcy law and is working in the debtors best interest. This helps to develop trust between the debtor and the attorney.)
The attorney may then ask the debtor to provide him with a list of items in the inventory and the approximate market value so he can obtain a clear picture of the asset in question. The attorney may also explain to the debtor what is meant by the term market value. The attorney would then allow the debtor time to review his business inventory figures and provide him with a more accurate figure.
However, if the debtor is struggling with providing the correct figures, and since this is such a crucial issue within this particular bankruptcy petition, the attorney may request that the debtor hire a licensed appraiser to provide an accurate inventory as well as better market values. Besides, with business inventory assets this large, the bankruptcy trustee may request one from the debtor anyway. By the attorney requesting one now, it may save the attorney and debtor a great deal of time in the future.
Will the Court Really Take the $100,000 in Unexempt Business Assets?
I do not know. You do not know. The attorney does not know. The only time this question will be answered is when the trustee and the creditors have had an opportunity to review the filed bankruptcy petition. When this decision is made, the trustee will let the attorney know.
Perhaps, since the inventory is necessary for the debtor to keep in order to continue the normal operation of his business, the trustee may decide to fully protect and exempt the business inventory. Or, the trustee may decide to have the debtor pay all or a portion of the unexempt equity before a favorable discharge is granted. The only way to know for sure is to watch PACER and read the documents that are filed after the bankruptcy petition is filed.
Look for more tips like these to come your way soon.
Disclaimer:
The information in this article should not be considered legal advice. It is written by Victoria Ring, a certified paralegal and bankruptcy training instructor. All information is subject to the guidance of licensed bankruptcy attorneys in your U.S. state.
Victoria Ring
http://www.713training.com
http://www.713attorney.com
http://www.713bankruptcy.com
http://www.navba.org
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