Valuing your assets when filing out your bankruptcy schedules can be challenging. After all, what is a closetful of clothes or a garage full of tools worth?
You are tempted to ask: why does it matter?
Asset value matters in several different contexts in a bankruptcy case. Using the wrong measure of value or over-estimating the value of your “stuff” can be costly. Let’s see how.
Exemptions tied to values
Exemptions define what you keep despite bankruptcy. Exemptions are the living proof that you don’t lose everything in bankruptcy.
Most exemptions protect a dollar value in a category of assets: $27,900 equity in a home; $1875 in jewelry; $4450 equity in a car, etc. If the asset has value above the exemption, creditors have a right to that excess, non-exempt value. More on exemptions.
So, if you value the engagement ring by the price paid for it, rather than what you could sell it for today, you may either lose it to the bankruptcy trustee or have to buy the non-exempt equity from the trustee. It works a little differently in Chapter 13, which we’ll get to later.
Trustees look to sale value
Value matters even more for assets where there is no exemption available. Chapter 7 trustees are on the look-out for non-exempt assets that they can sell for the benefit of creditors. That’s their job. And the starting place on that hunt is the value you place on the asset in your bankruptcy schedules.
Trouble can result from either overvaluing and from undervaluing. Put a surprisingly large number on an asset and the trustee will want to know more, perhaps appraise the asset, list it for sale, etc. Put an unreasonably low value, and 1) you invite further investigation; and 2) you may lose credibility with the trustee. It runs like this: if the value on this asset was so unconnected to reality, what other misstatements or distortions are present in the schedules?
Tax lien is measured by asset value
In Chapter 7, tax liens survive the bankruptcy discharge. Your personal liability may be discharged for eligible taxes, but the lien lives on. If you want to obtain the release of the lien, the IRS typically wants you to pay the value you assigned to the asset in your bankruptcy schedules.
Exemptions don’t apply to the claims of taxing authorities
So, value your clothing at $10,000, and the feds want $10K after bankruptcy to release the tax lien on that clothing.
Values in Chapter 13
All the discussion of the sale of assets by the trustee doesn’t apply in Chapter 13 where you keep all of your assets.
But, the measure of what you have to pay to unsecured creditors in Chapter 13 to get a discharge is the net value of your non exempt assets. So, the greater the value of your non exempt assets, the more your creditors are entitled to receive through your Chapter 13 plan.
What’s the value formula
The core question is “what could you sell this item for in its present condition”. That’s the fair market value that matters. It’s irrelevant what you paid for the item, or what it would be if you could do needed fix-up, or if you waited til spring to sell. What could a trustee get, today, by selling the item.
The question is particularly challenging when the asset is a fractional interest in a business. Is there someone out there who would pay to take your place as an owner of the business? Or, if the trustee elected to sell the business as a whole (and pay your co owners their share), what’s the price a buyer would pay?
Finding fair market value
The more valuable the asset, the more it’s worth your time to get a real-world value. It’s worth it to get an appraisal or a broker’s opinion of value for real estate. Kelly Blue Book or the like serves for vehicles, if you pay close attention to both the accessory package of your vehicle and the estimate of its condition.
For business assets or tools, imagine holding a going-out-of-business sale: what would you expect to receive, today? For household goods, what would sale at a garage sale net?
It’s often lowering to realize that the things you’ve accumulated and treasure have little market value, but that reality serves you well when you’re valuing assets for bankruptcy.