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.

What’s my car worth? Automotive Valuation for Bankruptcy Purposes

The Bankruptcy Court has provided some guidance for valuing a car for the purpose of a Bankruptcy Petition:

“[A]djusting the Kelley Blue Book or N.A.D.A. Guide retail value for a like vehicle by a reasonable amount in light of any additional evidence presented regarding the condition of the vehicle and any other relevant factors” is an appropriate means of reaching retail value. In re Morales, 387 B.R. at 45.

The court agrees that the Kelley Blue Book is an appropriate starting point for a valuation analysis. The values it supplies are based on actual transactions occurring in relevant regional markets. They are admissible under Federal Rule of Evidence 803(17). The Kelley Blue Book is objective, serves the interests of standardization and predictability, and is cost-effective, which benefits the parties.

But the Kelley Blue Book retail values cannot be the final word. Retail value under 11 U.S.C. § 506(a)(2) and the Kelley Blue Book’s suggested retail value have slightly different meanings. Suggested retail value under the Kelley Blue Book “assumes that the vehicle has been fully reconditioned,” and only “represents dealers’ asking prices and... the starting point for negotiation” between a consumer and a dealer. Kelley Blue Book Auto Market Report 4 (May 2010)

By contrast, 11 U.S.C. § 506(a)(2) requires the retail value to mean “the price a retail merchant would charge for property of that kind considering the age and condition of the property.”

The Kelley Blue Book value therefore must be adjusted for two things. First, it must reflect the actual condition of the car if that condition is not optimal. Second, it must reflect the fact that the Kelley Blue Book value is the asking price for a retail sale, not the final price, as it is reasonable to believe that dealers do not sell vehicles frequently at the asking price."
(See In re Penny)

As a practice tip, consult both NADA and Kelley Blue Book private party value as a starting point, and then consider the actual condition to make appropriate adjustments.

Supreme Court Decision: Not All Consumers can use Car Ownership Deduction

The means test is a test required under the new bankruptcy law to determine a debtor's eligibility to file for bankruptcy under Chapter 7 of the Bankruptcy Code. If your income is greater than the median income for your state of residence and family size then you fail part A of the means test and must refer to part B.

In part B of the means test, you must take into consideration certain expenses as defined by the Bankruptcy Code and IRS relating to allowable housing expenses, utility expenses and other deductions, such as regular charitable donations (up to 15% of your income), school expenses, payments on 401(k)/IRA loans, and health insurance. If you are filing for Chapter 13 Bankruptcy, part B of the means test is also used to determine the amount of money left over in your budget for payment on a Chapter 13 Plan.

In either instance, there are two allowable deductions for owning a car: the "ownership" deduction and the "operating" deduction. If you own a car you can take the operating deduction in which the IRS standard estimates your cost for use of your car. If you owe money on your car then you can take the amount of your loan as an "ownership" deduction as well, and the court also provides an IRS standard estimate for the "ownership" deduction. But what if you don't owe any money on your car, or your lien expense is less than the standard "ownership" deduction?

This question was answered differently by a number of appeals courts in the U.S., and on Tuesday, January 11, 2011, the U.S. Supreme Court resolved the inconsistency by upholding a 9th Circuit decision on this issue. The Supreme Court in Ransom v. Fia Card Services (Judge Kagan's first decision on the high court), decided that a consumer who does not have a lien on their car in a Chapter 13 case cannot use the "ownership" deduction to reduce their payment. Although, not addressed directly by the Court, this decision would also presumably apply to use of this deduction to meet the Chapter 7 Part B Means Test.

The Court rejected the debtor's argument that this application of the law would result in unfair policies favoring people who owed money on their car (i.e. bought newer cars before filing bankruptcy), and based their decision primarily on the Court's interpretation of the use of the word "applicable" in the statute. Judge Scalia in his dissent points out the absurdity of this reading and the confusion it may create. Specifically, this ruling does not clarify whether the "ownership" deduction can be taken in whole when the lien payment is less. Although meeting the standard of being an "applicable" deduction, this result would not really make sense in light of the court's ruling.

Regardless of whether the ruling is completely consistent, it is now the law, and for Chapter 13 consumers that have paid off cars, this means they will be making higher payments to their creditors.

How should I List My Car on the Bankruptcy Schedules?

We recently posted about how the bankruptcy law affects your automobile, and whether or not you will be able to keep it if you file. One of the factors discussed in our previous post is how much equity is in your car (value minus loan balance). But what if the trustee disagrees about the value of your car?

In Schwab v. Reilly, 130 S.Ct. 2652 (2010), the Supreme Court decided that a trustee could auction an item of personal property (kitchen equipment in this case) and pay to the debtor any amount claimed exempt and distribute any excess received to the creditors.

As an example, if you list the value of your car to be $3,000 and claim a $3,000 exemption, then your car is fully exempt under the Federal Exemptions. However, under the Schwab case, if the trustee believes your car to have a value over $3,000, then the trustee can take the car, auction it, give you $3,000 and pay any extra received to the creditors. Considering that in this example you had further exemption available ($225 for a motor vehicle and up to $11,200 in "wild-card"), this result seems unfair, but is within the trustee's powers.

We generally recommend that clients obtain a fair market value for their car from kbb.com, nada.com or edumunds.com rather than guess or estimate the value.

In addition, in order to avoid the scenario in Schwab, when listing your car (or other personal property that is particularly important to you) in the bankruptcy schedules you should claim the exemption up to the maximum amount available by stating in the description of the item that "debtor intends to exempt 100% of fair market value." This is the language suggested by the Supreme Court in Schwab.

UPDATE: The Massachusetts Exemptions have recently changed. For more information read our post on the changes: New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.

What Will Happen to My Car if I File for Bankruptcy?

When filing for Bankruptcy under Chapter 7 and Chapter 13, certain property of the debtor is exempt from the Bankruptcy estate, which means simply that the debtor can keep that property (and the trustee and creditors can't take it).

When filing a Bankruptcy as a resident of Massachusetts a debtor can choose to use the exemptions allowed under either State or Federal law, but you must choose one or the other. There are many exemptions that are similar under both schemes and many that are different.

As of April 14, 2009, the allowable exemption for motor vehicles was $3,225 under the Federal Exemptions and $700 under the Massachusetts Exemptions. This means that if you choose the Federal Exemptions you can keep your car so long as it has less than $3,225 in equity (value of the car minus balance of the loan).

In addition to the value of the motor vehicle exemptions, the Federal Exemptions also allow for some "wild-card" exemptions: $1,075 generally and $10,125 of unused homestead exemption. If you have few other assets besides your car you may be able to use these "wild-card" exemptions to exempt further equity in your car if it has equity over $3,225.

If your car is subject to a loan you will have to reaffirm said loan or the car will be surrendered to the lender or trustee for sale. For more information about available exemptions click here.

UPDATE: The Massachusetts Exemptions have recently changed. For more information read our post on the changes: New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.