Bankruptcy trustees are in business to make money.
Most knowledgeable sources recommend against people filing bankruptcy cases without an attorney.
But not Chapter 7 bankruptcy trustees.
I recently attended a panel of some Chapter 7 Trustees who quite honestly admitted this fact.
And why do they prefer this?
Because trustees make more money when the party filing bankruptcy (debtor) has no legal representation.
What Do Bankruptcy Trustees Do?
In Chapter 7, a Trustee’s job is to liquidate (sell, obtain) any non-exempt assets of the debtor.
Those funds are then used to pay creditors of that debtor according to their legal priority.
If an asset is available (i.e. not protected) they have a duty to liquidate it to pay the creditors.
This is the way the system works, and it makes sense.
This is no surprise to any bankruptcy attorney, and a shock to those who don’t have an attorney.
A self-represented debtor files a case listing the value of their home at a certain value, thinking it is fully protected.
Then the trustee finds a buyer for much more than the exempt amount of the property and sells it.
Or, the Trustee sells a co-owner’s interest in property.
Happens all the time.
Without an attorney, it is unlikely you have properly planned for the huge number of traps that can arise in a bankruptcy case.
- Did you know that property values can increase after a case is filed and the Trustee is entitled to that increase?
- Have you properly accounted for that in your pre-bankruptcy planning?
- Have you considered how property that you have recently sold or transferred, perhaps due to a divorce, might be at risk?
How Bankruptcy Trustees Get Paid
Chapter 7 Trustees get a very small statutory payment for each case they take.
Presently this is around $60.
Not surprisingly, this is not sufficient to pay their employees, business expenses, and support their families.
They do it by selling non-exempt assets of the debtors who file bankruptcy cases.
Trustees get a percentage of the funds they disburse to creditors.
They get these funds by selling property and marshaling available assets from those that file bankruptcy.
Typical assets that are sold or liquidated include houses, cars, life insurance, residuals, royalties, and recovering improper pre-filing transfers of assets.
What Assets Are Exempt (Protected)?
Every state has its own exemption laws which determine how much of the value of property one owns can be protected.
There are also federal exemptions which may apply in a given case.
Knowing how these exemptions work and how best to maximize their effectiveness is often the difference between keeping or losing your property.
See more on determining exemption laws apply in your case: https://www.bklaw.com/bankruptcy-exemptions/
How Attorneys Protect Assets
It is important to know how to utilize available exemptions in a case to ensure your assets are protected.¹/
A good bankruptcy attorney will insist that you obtain appropriate values of your property.
What qualifies as an “appropriate value” depends on the specific asset in question as well as the facts of the case.
For example, with real estate I have my clients obtain at least two independent written Brokers Price Opinions (BPO).
For vehicles I ask for both the blue book trade-in value and NADA retail value.
Different values are used in different contexts.
Once the attorney knows the value of ALL relevant asset values, and which state or federal exemption laws apply, he or she can then determine the risks of filing any given Chapter.
Assets that might be at risk in a Chapter 7 would not be in a Chapter 13.
But the required payments in a Chapter 13 might be too high.
So there may be a need for what courts term “exemption planning“.
Exemption planning is basically moving a potentially non-exempt asset into an exempt one.
For example, let’s say you have $20,000 sitting in a bank account which is not protected. You might–depending on the applicable exemption laws–take that money and put it into a whole life insurance policy from which you could borrow the money.
Life insurance policies are often exempt up to a certain amount.
Exemption planning is NOT something you should attempt to do without an experienced bankruptcy attorney guiding you.
And that is really the point of this article.
Hire A Bankruptcy Attorney
Unless you work day in and day out doing bankruptcy, you are not going to know how to properly value your assets.
You won’t know how to maximize your exemptions.
You won’t know how to protect any co-owners of property.
You won’t know how to select the appropriate Chapter under which to file.
And you won’t know how to do about 100 other things that are necessary to maximize your benefits and minimize your costs when filing a bankruptcy case.
It is critical to hire an experienced bankruptcy attorney. Let the Trustees get their big profit from someone else.
1/ There are certainly times when a Chapter 7 case will be filed with full knowledge that the assets will be sold by a Trustee and it is a win-win for all concerned. The point of this post is to properly plan for your case so you are maximizing your allowed benefits while minimizing the costs.
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