Over Exemptions? Pay Cash to the Trustee and Sleep Better
The gold standard for Chapter 7 bankruptcies is the “no asset” case, when a debtor’s equity in his assets is less than allowed exemptions. Because so many people are way over leveraged, that happens 95% of the time. The “no asset” case is desirable for at least two very good reasons: (1) you get to keep all of your property; and (2) your case gets closed in around 100 days.
On the other hand, in some states where the exemptions are not especially generous, a debtor’s equity in their cash, investments, real estate, furniture and other assets may well exceed the allowed exemptions (this is especially so when a debtor has recently paid off a car that retains significant value). This happens frequently in Maryland, where exemptions are only $12,000 for everything but your house and your retirement accounts.
When a client is “over exempt” we try to identify this issue in the planning phase. The client is usually faced with a choice: make payments in Chapter 13 to buy back this equity from the creditors over time, or bargain with the Chapter 7 trustee to make a payment (or series of payments) to buy back the equity now.
Many clients simply don’t have a choice: with no access to cash, and holding an asset that is illiquid, they really have to face the rigors and commitment of a Chapter 13 case. But for many other clients, a Chapter 7 asset case is definitely the way to go. This is because the Chapter 7 trustee knows that the debtor is usually the best buyer for these assets, and a sale to the debtor, even at a reduced price, beats the unknown question mark of exposing assets to the open market. For this reason, debtors usually can strike a very favorable bargain with the trustee to pay cash to keep the assets. This result beats by a long shot the cost, time commitment and rigidity of Chapter 13 or, even worse, staying out of bankruptcy and letting the creditors pick away at your assets and your property.
For most Chapter 7 trustees, a small asset case is a mixed blessing. Sure it allows them to have a payday more than the $65 they typically receive in a case, but having an estate of say $7,500 requires plenty of notices and administration for creditors who may get only a penny on the dollar. Nevertheless, for the debtor, even when you have to write a check to the trustee you’re receiving a discharge of tens or even hundreds of thousands of dollars in debt.