Learning to Fly and Bankruptcy Exemptions

I would like to lean to fly. Not in a superman sense – in a “small aircraft” sense. As the first step in achieving that goal, this past weekend, I took a flying lesson and had a great time. When I was done, I was mulling over the legal ramifications of aircraft ownership, and as my legal mind started to wander, I pondered how the ownership of an aircraft would be handled in a bankruptcy. While this may not be where your mind would have wandered, consider it an occupational hazard of being a bankruptcy attorney. I don’t want you to get the wrong impression, but when you are a bankruptcy attorney, you sometimes can’t help but look at the world through a proverbial “bankruptcy filter”.

Since not everyone wants, or owns, an airplane, writing an answer to “how would a small aircraft be treated in bankruptcy” might seem somewhat superfluous. In fact, the rest of the people in my office would no sooner get into a small plane as they would shave their head. But what occurred to me is that nearly everyone has their “learning to fly.”

In good financial times, most of us purchase “toys” or other items that support our hobbies, but what happens when the same folks may be facing bankruptcy? If selling the toys and paying the debt is not an option, how are these items treated in bankruptcy? The “toys” could be anything: aircraft, boats, motorcycles, or classic cars. Maybe motors aren’t your thing, but you have a nice collection of high-end computers and electronics. If you spend your Sundays working in a wood shop, woodworking equipment or other tools might be your “toys”.

How are these hobby items treated in bankruptcy?

Like any other asset, the item you seek to protect must be disclosed to the bankruptcy court (along with all other assets) and are subject to acquisition by the trustee if they are not exempt under the Federal or Massachusetts exemptions. There are a number of exemptions that may be used to establish the exemptability of items. Ultimately, the amount of the allowable exemptions may be affected by the debtor’s desire to exempt other personal property, but generally speaking, the following exemptions are available to protect a debtor’s items which do not fall into a specific exemption category (such as jewelry, certain religious articles or motor vehicles, which are discussed later on):

Federal Exemptions:

11 U.S.C. § 522(d)(5): $1,150.00, which is federal catch-all exemption and may be applied to any personal property owned by the debtor;

11 U.S.C. § 522(d)(5): Up to $10,825.00 of unused home equity not already exempted under 11 U.S.C. § 522(d)(1);

11 U.S.C. § 522(d)(6): $2,175.00 for tools and equipment used in business. For this exemption to be applicable to the debtor, the debtor must establish that the items are necessary for the debtor’s trade, employment or business.

Massachusetts Exemptions

A debtor filing for bankruptcy in Massachusetts may elect either the Federal exemptions or the Massachusetts exemptions. Massachusetts exemptions applicable to firearms ownership are as follows:

M.G.L. c. 235 § 34(5): $5,000.00 for tools and equipment used in business. Like the federal exemptions, for this exemption to be applicable to the debtor, the debtor must establish that the items are necessary for the debtor’s trade, employment or business. Therefore, if the items are used in the debtor’s business or money-making efforts, they may be exempt up to $5,000.00, regardless of their less intrinsic value as hobby items to the debtor.

M.G.L. c. 235 § 34(17): Up to $6,000.00, representing the debtor’s aggregate interest in any personal property, not to exceed $1,000 in value, plus up to $5,000 of any unused dollar amount of the aggregate exemptions provided for the exemption of household furnishings, tools of the trade and a motor vehicle.

Special Considerations for Motor Vehicles

In Massachusetts, you can exempt up to $7,500 in equity in one car or other vehicle that you use for personal transportation or to find or maintain employment. If you are 60 years of age or older, or if you are disabled, you can exempt up to $15,000. If you decide to use the federal bankruptcy exemptions, you can exempt up to $3,450 of equity in your motor vehicle. The law does not care if your one primary vehicle is a 2005 Honda Civic, a 2012 Harley-Davidson Dyna Super Glide or a 1969 Yenko Camaro; only the amount of the debtor’s equity in the vehicle matters.

If the item you seek to protect is a registered motor vehicle, but not your primary mode of transportation, some trustees will disallow an exemption claimed under either the federal or Massachusetts “motor vehicle” exemptions. Additionally, although the Massachusetts exemption laws specifically state “automobile”, many trustees will not object to the debtor’s attempt to discharge a motorcycle if it is your primary mode of transpiration.

So, what does this all mean?

It means that the answer to the original question is “it depends”. The ability to exempt hobby items largely turns on the value of the item, and the other expemptions already claimed by the debtor for such necessities as their home, household goods and furnishings, or employment-related tools. In a “perfect storm” of circumstances, you may be able to exempt upwards of $20,000 of equity in your “toys”, but the real value depends on the totality of circumstances in your bankruptcy case.

If you are facing bankruptcy and have personal and other property, such as a home and retirement accounts that you want to ensure is protected through the bankruptcy process, contact Attorney Matthew P. Trask to learn more about how to protect your assets and find your financial freedom.