Bankruptcy Basics: Covering Your Assets

So, you’re in a tight spot and you’re thinking about filing bankruptcy, eh?  The aim of bankruptcy is simple: pay creditors as much as possible while leaving the debtor (the person filing bankruptcy) with enough assets to have a “fresh start.”  The way to accomplish that goal, however, involves quite a bit of work.
First, you have to list all of your assets and estimate their value.  Yes, that means you’re listing the value of your clothes, your fridge, your bed, your lamps, your cars, your home decorations, your jewelry… the list can go on and on (in some cases the list is short… that’s okay too!).  Coming up with values can often be quite difficult.  I mean, after all, how much is a pile of used clothes worth?  Items are obviously worth much less used than new.  So, estimate how much they would get sold for in an auction (or maybe how much they would go for if you were to sell it on Craigslist).

Once you have listed all of your assets, then you get to go through and “exempt” certain assets.  When you “exempt” an asset, you keep it out of the bankruptcy estate’s hands.  You get to keep an item that is exempt.  Said another way, if an item is exempt it will not be sold off to pay your creditors (the people to whom you owe money).   Some very common exemptions in Idaho are:
$100,000 in equity in your home,
$7,000 of equity in one vehicle*,
$7,500 in household items such as beds, fridges, tables, animals (yep, that includes Fido), jewelry, etc. (However, no one, single item can be worth more than $750)*,
$750 value in one firearm*,
$800 in any tangible personal property*.

If there’s an *, it means that if you are filing bankruptcy with your spouse, you each get that exemption (so you get two of them).  Of course, there are many more, but those are some of the most common.  Now, keep in mind, these amounts refer to equity.  Equity is the value of something less any loans against it.  For instance, if you have a car worth $20,000, but you owe $15,000 on it, then you have $5,000 in equity.  So, even though you have a $20,000 car, you could exempt it and keep the whole thing because the equity is less than $7,000 (there’s only $5,000 of equity).

What happens if an item is only partially exempt?  For example, let’s say you have a car that is worth $10,000 and you own it free and clear.  You exempt $7,000 of it, but there’s still $3,000 left for the trustee and creditors.  Typically, you’ll have a couple of options.  One option and this is the default option, is that the trustee will take the vehicle and sell it.  Once sold, the trustee will pay you your $7,000 and keep his $3,000.  Yep, that means you’re out of your car and you’ll have to buy another vehicle.  Another option, however, if you have a family member that can loan you $3,000, you can simply “buy out” the trustee.  In that scenario, the trustee simply gets paid the $3,000 difference and lets you keep the car.  It should be noted that the money does need to come from a family member.  If you were going to “pony up” the money, the trustee would suddenly be very interested in how you acquired $3,000 cash right after filing for bankruptcy.  Alternatively, if you have an item that does not have an exemption, the trustee will sell it and he gets to keep all the money.

That, in a general sense, covers the assets side of bankruptcy.  In future posts, we’ll get into the other areas of bankruptcy.