When a person files a bankruptcy case, all the property they own, with some limited exceptions, becomes property of the “bankruptcy estate.” The bankruptcy trustee assigned to the debtor’s case legally controls all the property in bankruptcy estate. In a chapter 7 bankruptcy case, the trustee’s job is to determine which property is exempt (legally protected from being taken to pay debts) and which property is nonexempt, or available to be taken to pay debts. The chapter 7 trustee is responsible for either taking the nonexempt property and liquidating it (converting into cash) to pay the debtor’s creditors, or allowing the debtor to essentially “buy back” the property from the trustee, so that the debtor may keep the property. The proceeds of the bought back property are likewise paid to creditors. In a chapter 13 bankruptcy case, the debtor is allowed to keep their property and all of the property of the bankruptcy estate legally passes back to the debtor when their repayment plan is confirmed (approved by the court).  However, the amount of the debtor’s nonexempt property is still important, as this amount is the minimum amount that the debtor must pay to their unsecured creditors over the life of their three to five year repayment plan.

The debtor is required to list all of the property in which they have any type of ownership interest, including property they do not yet own but to which they currently have a right and expect to receive in the future (i.e. future tax refunds and the money from a pending lawsuit). Properly valuing one’s property is obviously important in that it directly impacts the amount of property they keep or surrender to the trustee, in a chapter 7, or the amount of their monthly payments, in a chapter 13 case. But, how does one accurately value property? It would be too tedious and expensive to expect the debtor, or trustee, to have a professional appraiser value all of the debtor’s property. Although, in certain circumstances, where the property is valuable, and the debtor and trustee value the property differently, an appraisal may be needed.  

The debtor is simply required to make a good faith estimation of their property’s “fair market value” when they list it in their bankruptcy petition. This is essentially a reasonable estimation of what they could expect to sell the property for on the open market.  It is certainly not an exact science. As long as the debtor is honest in their estimation of the property’s value, they fulfil their obligation of disclosure to the bankruptcy court, even if it turns out later that their valuation was incorrect, in which case they may need to amend their petition.

For most ordinary personal property, such as household goods, clothes, jewelry, electronics, appliances, furniture, tools and yard equipment, recreational/sports equipment, etc., a reasonable estimation of the property’s fair market value can be estimated by simply imaging roughly about how much the property could be sold for at an auction, yard/garage sale, EBay, Facebook Marketplace, or through other advertised means, to another ordinary buyer. Vehicles are typically best valued by using Kelly Blue Book (sold to a private party, rather than a dealership). However, if the vehicle is too old, or has too many miles on it, the vehicle may be more accurately valued based on how much it could be sold for at an auction or other private sale in its current condition. The specific mechanical issues unique to each vehicle are also an important consideration in determining valuation. Other valuable recreational property, such as motorcycles, ATVs, snowmobiles, and boats, are not listed on Kelly Blue Book but may be valued on other websites (i.e. nadaguides.com for motorcycles).  Looking at how much others have sold similar recreational property on sites such as EBay, Craigslist, or Facebook Marketplace may also be a good way to value such property. As with other personal property, the debtor’s honest good faith estimation of the value of the property will be good enough.

As for the debtor’s ownership interest in real property, the valuation of such property can be ascertained from a number of sources. The fair market value estimated by the County Tax collector is one way to value real estate. A debtor who owns real estate will receive a yearly Property Tax Statement from the County in which the property is located. The statement will provide an estimated market value of the real estate for property tax purposes. However, this property tax valuation is often much lower than the estimated market value of the real estate as reported on popular websites, such as zillow.com or realtor.com. In certain areas, such as around the Twin Cities metro, where home values are currently high, the values listed on these websites are often more accurate than the valuation on the Property Tax Statement. It should be no surprise that trustees typically favor the higher value as provided on websites, like zillow.com, while debtors tend to favor the lower amount stated in the Property Tax Statement. In cases where there is a dispute as to the valuation of the real estate between the debtor and the trustee, it may be necessary to have an actual professional appraisal of the property done to settle the dispute. A debtor may want to also consider contacting a realtor to do a comparative market analysis (CMA) to value their real estate if they cannot afford an actual professional appraisal. A CMA, typically performed for free by a local realtor, estimates the valuation of the home based on the relative values of other homes in the same neighborhood. However, the CMA may not be as accurate as an actual appraisal due to the fact that it does not take into account the unique characteristics of the property, such as improvements made by the debtor upon moving in and potential defects (i.e. plumbing deficiencies, design defects, or damage from a storm). Getting an accurate valuation of the debtor’s is real estate is very important for ensuring the home will be exempt, and protected (it almost always is), and for which exemptions, State or Federal, are needed to exempt the real estate. As elaborated upon in other blogs, whether the debtor chooses State or Federal exemptions is important, as it has an impact upon how much of the debtor’s other personal property will be exempt, and protected from creditors.

It is also important to understand that only the debtor’s actual ownership interest in property is property of the bankruptcy estate, which is not always the same as the total fair market value of the property. For example, a debtor who shares a deed to their house with their spouse, and a joint car title with their brother, has only a one-half (50%) interest in the car and home with each other person. Furthermore, their interest consists only in their share of the equity in the property. Equity is the amount the value of the property exceeds any amount of secured debt for which the property serves as collateral (i.e. a car loan or home mortgage).  So, for example, suppose the debtor is jointly on the deed with his or her spouse on their homestead real estate with a fair market value of $200,000.00 and a remaining mortgage balance of $100,000. The equity in the real estate is $100,000.00 (the difference between the value and the mortgage balance). Of the $100,000.00 in home equity, one half of the equity belongs to the debtor and the other half belongs to the debtor’s spouse. Only this $50,000, ownership interest in the home equity is property of the bankruptcy estate, which can be exempted under Minnesota State Exemptions, as it exempts up to $450,000.00 in homestead equity. The debtor’s ownership interest in personal property, such as household goods, electronics, sports/hobby equipment, and etc. can also be shared with others, particularly others who share the debtor’s household, such as the debtor’s spouse, significant other, or the debtor’s dependents. For example, a debtor and his or her spouse whom live together and share usage of television sets will likely be deemed to each have a 50% ownership interest in the television sets. Sometimes, it is also relevant whose funds were used to purchase the property to determine ownership interest. Personal property purchased with funds from a joint bank account shared by the debtor and another is more likely to be considered jointly owned property, than if the debtor simply used their own funds to purchase the property.

CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT LIFEBACK LAW FIRM

Valuing property and determining what property owned by the debtor is part of their bankruptcy estate can be complex. Determining which property of the bankruptcy estate will be considered exempt versus which property will be considered nonexempt is likewise complex. For these reasons, a person considering filing for bankruptcy is well advised to speak with an experienced bankruptcy before filing their bankruptcy case. See us at LifeBackLaw.com!