[1]Most chapter 7 clients are looking for the quickest and easiest way to discharge their debts, retain or protect their assets and move on with their lives. Difficulties in achieving these results can arise when assets are disclosed or discovered after the bankruptcy filing. This will usually result in negative consequences for the debtor and will frequently prolong their case.
A more common situation arises when a chapter 7 trustee believes that there is exposed equity in property of the estate, or the trustee believes that the property is a type that may appreciate in value, which may create exposed equity. This will usually result in a case remaining open until the asset is liquidated, which can sometimes take months or even years. These unforeseen situations create frustration for the debtor and can cause a financial and administrative burden on the debtor’s attorney. This article discusses certain practical and legal tools available to debtor’s counsel in addressing and/or avoiding these situations.
Utilizing Exemptions Properly Can Avoid Unnecessary Delays
Ensuring that federal exemptions or the proper state exemptions are being claimed is one way to have a trustee abandon his or her interest in property of the estate.[2] Claiming the proper exemptions and preserving the right to amend exemptions at the beginning of the case is vital. The debtor’s attorney must always be mindful of the fact that assets of the estate may appreciate in value. The Supreme Court offered guidance for protecting an asset’s future value by utilizing the proper description of the asset’s “fair market value” or “100% of the fair market value” as crucial in order to protect any rights that the debtor may have in the future.[3] Just because an asset may appreciate in value, it does not necessarily allow a trustee to keep a case open with hopes that the market will improve and the value of an asset will increase.[4] In M & S Grading, the Eighth Circuit reasoned that the trustee’s duties include the prompt sale of assets of the estate under 11 U.S.C. § 704(a)(1).[5] Holding assets of the bankruptcy estate indefinitely contradicts the duties of the trustee and leaves the estate and the debtor’s future in limbo.
While amendments to the schedules may be completed at any time prior to the closing of the case, re-evaluation of the application of the exemptions or repositioning of the exemptions may be in order to protect nonexempt or underexempt assets of the debtor.[6] While amendments are allowed before the closing of a case, they should be completed as early in the case as possible to avoid deadlines and potential objections from the trustee or creditors. Forthright communication with the chapter 7 trustee regarding amendments and pertinent analysis will aid the trustee in concluding that there may not be an asset to be liquidated.
Requesting Abandonment Through 11 U.S.C. § 554
While seemingly simple, getting a trustee to abandon her interest in property of the estate can be a lengthy and drawn-out process. Most chapter 7 cases are “no-asset cases” where the trustee does not find assets that need to be administered. Accordingly, the trustee will file a “no-asset report” or “no-distribution report” with the court.
In cases where there is a potential asset, the trustee may continue or adjourn the § 341 meeting in order to obtain additional information, whether through the debtor’s attorney or through their own investigation. Many times at this stage, communication with the trustee is critical, especially if the chapter 7 trustee is under the misguided belief that there is an asset of the estate to be administered. Additional documentation or information from the debtor or other reliable sources can assist the chapter 7 trustee in correctly determining that there are no assets of the estate to be administered.
Ideally, getting the trustee to abandon the asset at the § 341 hearing is better for both creditor and debtor alike. Conversely, having the trustee provide for her intention to abandon an asset through a letter could also be effective.[7] Nevertheless, abandonment of property by the trustee orally or by letter, unless otherwise ordered by the Court, under 11 U.S.C. § 554(c) is merely an “intention” to abandon property and still requires that the property be listed in the debtor’s schedules pursuant to 11 U.S.C. § 521, and is only deemed truly abandoned upon the closing of the case pursuant to 11 U.S.C. § 350.[8]
At times, getting the chapter 7 trustee to abandon an asset is difficult. The trustee may wait to administer an asset for many reasons: The asset could be appreciating in value, contingent upon a condition precedent, or involve a difficult legal issue, or the chapter 7 trustee could simply be overburdened and has not yet had an opportunity to liquidate the asset. However, the trustee cannot keep the case open indefinitely.
This will many times lead the debtor to facilitate the abandonment of assets in a case by utilizing 11 U.S.C. § 554. Debtor’s counsel may request a court order for abandonment of the property; however, debtor’s counsel will need to provide notice of intent to abandon under Rule 6007(a), and a hearing must be scheduled. The bankruptcy court has the discretion to order abandonment if it finds that either (1) the property is burdensome to the estate, or (2) the property is both of inconsequential value and inconsequential benefit to the estate.[9] “An order compelling abandonment is the exception, not the rule. Abandonment should only be compelled in order to help the creditors by assuring some benefit in the administration of each asset.”[10] The court will balance the interests of all of the parties, the rights of the creditors to receive a payout and the right of the debtor to receive a fresh start. The party requesting the abandonment has the burden of proving that abandonment is appropriate.[11]
The real battle is determining whether the liquidation of an asset is of inconsequential value or whether there will be a benefit to the estate. The trustee cannot sell property for the sole purpose of increasing her commissions.[12] At one end of the spectrum, the court has held that if the total distribution of an asset, after taking into account all encumbrances, costs of sale, all applicable exemptions, and trustee’s fees associated with the sale, is going to be less than 2 percent of all the claims, a court could determine that there is only a de minimis benefit to the estate and therefore abandonment is appropriate.[13] On the other end of the spectrum, $15,000 in proceeds from the sale of an asset may create a situation in which a moving party has failed to demonstrate that the proceeds were burdensome or of inconsequential value to the estate.[14]
In conclusion, debtor’s counsel has several practical and legal tools to protect assets while facilitating the abandonment of debtor’s assets by using two tools. The exemption tools can protect post-petition appreciation in an asset’s value, so careful use of the exemptions and forthright communications with the chapter 7 trustee regarding amendments and pertinent analysis will aid the trustee in concluding that there may not be an asset to be liquidated. Abandonment is also a significant tool to be utilized through good communication with the trustee in order to avoid unnecessary litigation by providing additional documentation or information to assist the chapter 7 trustee in correctly determining that there are no assets of the estate to be administered. Abandonment can also be utilized to bring the issue before the court and request that the court declare the asset as abandoned by proving that the asset is burdensome or of inconsequential value and is not a benefit to the estate.
[1] Mr. Bollinger would like to acknowledge the contributions of Angela M. Haen and Jennifer T. Langley, attorneys with Boleman Law Firm, P.C., in the preparation of this article.
[2] 11 U.S.C §§ 541(a) and 522(a).
[3] Schwab v. Reilly. 130 S. Ct. 2652 (2010).
[4] In re M & S Grading Inc., 526 F.3d 363, 367 (8th Cir. 2008).
[5] Id. at 367.
[6] Fed. R. Bankr. P. 1009.
[7] . In re Vanhook (Bankr. D.N.J. 2012), 468 B.R. 694.
[8] Stanley v. Sherwin-Williams Co. (W.D. Va. 1993), 156 B.R. 25.
[9] In re K.C. Mach & Tool Co., 816 F.2d 238 at 245 (1987).
[10] Id. at 246.
[11] Hanover Ins. Co. v. Tyco Industries Inc., 500 F.2d 654 (3d Cir. 1974).
[12] K.C. Mach & Tool Co., 816 F.2d at 246.
[13] In re Thornton, 269 B.R. 682 (Bankr. W.D. Mo. 2001) ($1,119.51 held to be de minimis).
[14] In re Bregni, 215 B.R. 850 (Bankr. E.D. Mich. 1997).