Valuation of Assets in Bankruptcy: A Primer
Perhaps the most confusing part of any bankruptcy petition -- especially if you are filing pro se -- are Schedules A and B, where you declare your assets and their values. Schedule B, where you declare your personal property (i.e., anything not real estate), has dozens of categories, including a catch-all at the end for "Miscellaneous Property". Looking at everything the bankruptcy court asks for, one cannot help but wonder, "what the heck are the values for all of my property?" Valuing your assets is extremely important in a Chapter 7 or Chapter 13 individual bankruptcy petition. In both Chapters, accurately reporting the value is necessary to take advantage of asset exemptions allowed under California state law. In Chapter 7, asset exemptions allow you to keep a lot of property out of danger of a bankruptcy trustee seizure and liquidation. In Chapter 13, asset exemptions allow you to keep this same property out of calculations to determine how much you should pay your unsecured creditors over the course of a repayment plan. "Great", you're probably thinking, "I know it's important now. But I still have no idea how to value my eight year old television set." Fortunately, you do not have to be 100% accurate with your valuations; being in the ballpark for some assets is sufficient. But there are a few guidelines all debtors should follow when attempting to value some assets. The most important thing is to recognize that the bankruptcy trustee is concerned with the current market value of your asset. This post will go through three categories: real property, vehicles and beneficiary interests in trusts. Real Property Let us assume you bought your house in 2006, at the height of the real estate boom. Today, in 2011, after real estate prices cratered and then stagnated, that house is most probably not worth anything close to what you offered for it. Even though a high valuation will place more value in your bankruptcy estate, does this mean you should indicate the 2006 sale price? No, of course not. If the trustee were to seize your house, s/he would not get anything close to that price; you may invite a trustee seizure when one could have been avoided. Still, how do you accurately value your property? Well, look around your neighborhood first and get an idea for values in your area for similar-sized homes (similar to the first step toward selling your house). To get an influential opinion of value, call up a qualified appraiser who knows your neighborhood; he will come to your property, do a walk-through, ask some questions and provide you with an appraised value, listing his reasons for that valuation on an official-looking form (for a fee). Finally, the county tax assessor's office will have its own valuation for the property; you can ask an assessor to come to your house to appraise the value. (The tax assessor, however, will most probably provide the highest and most inaccurate valuation; the tax man, after all, does not want your tax bill to go down.) After you have done all of this research, figure out the most likely value you could possibly sell your house for and indicate that as the value of your real property on Schedule A. If questioned by the trustee on the value (or challenged by a creditor, the trustee or any other party of interest in court), provide copies of the private appraiser's report, the assessor's report and any brochures you collected from around your neighborhood for similar houses. As long as your indicated value is reasonable, it will be allowed to stand. At worst, if another party provided an appraised value noticeably higher than what your appraiser determined, the court will just split the difference. In a Chapter 13 (or Chapter 11), real property valuations are important for another big reason: lien stripping. In essence, if you are "underwater" (mortgage obligation value is higher than the market value), you can ask the court to strip the unsecured portion of the lien and convert it to unsecured debt. A word of warning: lien-stripping is a limited option for a primary residence. Cars and Other Vehicles Valuing a car, truck or other vehicle should be a relatively simple exercise compared to valuing real property. For one thing, it should not cost you a dime and could be done in the next ten minutes. The most important thing is to find out what you can sell your vehicle for. For book value on automobiles, there are two influential authorities: Kelley's Blue Book and Edmund's. Both offer to estimate the value of your automobile based on specifications you provide. While book value is not exactly current market value, it may be used as a proxy if nothing else (in fact, book value is generally higher than current market value so it is a "safe" choice). Both KBB and Edmund's provide on their websites ads for dealers selling your specified automobile in your area, as well. Those ads, however, most probably are for "good" or "excellent" condition vehicles that the dealer spent substantially less to purchase; those prices cannot reasonably reflect what you can get for your vehicle. If need be, you can call these dealers and ask how much they would purchase your vehicle for. These price quotes, combined with book value, can also provide a basis for current market value. Such a strategy works for other types of vehicles: motorcycles and scooters, boats, RVs, ATVs, etc. Find an authoritative source for the vehicle's book value, ask dealerships and then come up with what you believe to be a reasonable selling price point. As long as it is reasonable, it will not be challenged by the trustee or any other party. Though generally associated with real property, cars and other vehicles encumbered by loans can also be "underwater". Lien-stripping in Chapter 13 or Chapter 11 can strip off the full unsecured portion of any loan. There is no "primary vehicle" exception. Beneficiary Interests in Trusts Many people are named beneficiaries in trusts and similar legal instruments. If a benefit will not accrue for years, it is still an asset that must be declared on a bankruptcy petition. For example, if you are 25 years old and you are scheduled to receive from a trust $500,000 or a piece of property on your 35th birthday, then you must declare that interest on Schedule B. In a Chapter 7, it is in fact an interest that the bankruptcy trustee can seize and liquidate (yes, there are buyers for such future interests). You may be thinking: "great, I'll just let the trustee liquidate the trust interest and receive $500,000 minus my debts now instead of 10 years from now." It does not work that way. Since the interest is in the future and there is a risk the trust could become insolvent or worth substantially less before then, it is highly unlikely the trustee will get anywhere near $500,000 for your interest. If you are a current beneficiary of a trust, then those assets you have the benefit of must be listed as assets. For example, if one benefit is to use a house for your entire life, that is an interest that must be listed. However, if the benefit of the house is to pass to somebody else at a set time or upon your death, how do you value that interest? It is probably impossible to do so. The future interest to the property will be a huge encumbrance on your asset and the asset may therefore provide no value to your bankruptcy estate; you can even ask the court to remove it from the bankruptcy proceedings. If you are receiving a regular payments from a trust, it is dangerous for you to enter Chapter 7. That regular income is an asset that must be declared; in fact, you must declare you entire future interest from that income. Unless the trust is a spendthrift trust (which are specifically designed to protect trust assets from creditors of beneficiaries), the total future interest in the trust of the debtor can become part of the bankruptcy estate. If you are the grantor and a sole beneficiary of a spendthrift trust, prepare to be questioned closely on the transfer; the bankruptcy trustee has the right under the Bankruptcy Code to reverse all transfers up to ten years in the past (any transfer up to two years in the past to any trust may be reversed by the trustee if the transfer was done for an illegitimate reason under the Code, as well; longer under California law).
There are many other values you must determine for the property your in your possession. Each requires some expertise and analysis. It is best to talk to a bankruptcy attorney.