(by David Maloney) Bankruptcy is a legal procedure designed both to protect an individual or business that can’t meet its financial obligations and to protect the creditors involved. The process of bankruptcy requires the debtor to create an expense report illustrating the “value” of their assets. In order to get a true reading of the value of the individual or business personal property involved, an appraisal is at times, but not always, necessary.
All bankruptcies are governed by Title 11 of the U.S. Code (Bankruptcy Code) and are processed through Bankruptcy Courts — part of the system of Federal courts. The Bankruptcy Courts of the 94 Federal judicial districts were created by Congress just to hear bankruptcy cases and make decisions about disputes between debtors and creditors.
The debtor begins the process by filing a bankruptcy petition with the Clerk of the Bankruptcy Court in the Federal District where the debtor has lived or has had a principal place of business. The various types of bankruptcy are referred to by their respective Bankruptcy Code chapter numbers.
Three types of bankruptcy filings are most commonly used:
- Chapter 7 bankruptcy is also called “straight” or “liquidation” bankruptcy. It is the simplest and easiest form of bankruptcy proceeding, and can be used by either individuals or businesses. Under Chapter 7, there is no repayment of debt plan. Nonexempt property (for individuals) is simply liquidated.If filing as an individual, all debtor property becomes the property of the “bankruptcy estate.” The bankruptcy Trustee can liquidate all nonexempt property in order to pay the unsecured creditors. Secured creditors are permitted to repossess the property upon which they have valid liens (such as an automobile.) To the extent that their nonexempt property does not pay their debts, except for obligatory debts such as taxes and child support the debts are discharged (i.e., forgiven). There is no “exempt property” for businesses filing Chapter 7.There are alternatives to filing a Chapter 7, though. An individual could consider a Chapter 13 debt repayment plan instead. If a business, the debtor could also consider a Chapter 11 reorganization plan.
- Chapter 13 is another type of bankruptcy proceeding often referred to as a “wage earner plan” or a “debt repayment plan” and can be used only by individuals, not by businesses. A Chapter 13 proceeding provides for an adjustment of the debts of an individual who has a regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years. Unlike Chapter 7 bankruptcy, a Chapter 13 is not a liquidation of the debtor’s property — it is a reorganization of his or her debts. Chapter 13 can be used only if the total amount owed is less than a certain amount for secured and unsecured debts. If in excess of those limits, the debtor can consider a Chapter 11 filing.
- Chapter 11. A case filed under Chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy, and is used generally by businesses but can be used by individual debtors who do not qualify for Chapter 13 because their debts exceed the Chapter 13 limits. For businesses, Chapter 11 bankruptcy is a form of corporate financial reorganization which typically allows companies to continue to function while they follow an approved debt repayment plan. The theory here is that otherwise viable businesses, if are allowed to continue to operate, will generate revenue, protect jobs, and be able to pay off creditors over time. A Chapter 11 bankruptcy (reorganization) can be converted to Chapter 7 (liquidation) under certain circumstances.
Property That is Exempted in Chapter 7
While businesses filing for Chapter 7 bankruptcy have no “exempt” property, individual filers do. Exempted property is intended to help individuals get a “fresh start” and includes such property as:
- Motor vehicles to a certain value
- Reasonable clothing
- Reasonable household furnishings and appliances
- Personal effects to a certain value
- Some public pensions
- A certain amount of equity in a home
- Tools of a trade or profession to a certain amount
- Public benefits such as social security, welfare, or disability payments
Property That is Not Exempted in Chapter 7
Nonexempt property is property that is not exempt from Chapter 7 attachment. Such property can be liquidated by the Trustee in order to help pay the individual debtor’s obligations to creditors. Examples of nonexempt property in a Chapter 7 bankruptcy are:
- Cash, stocks, bonds and investments over a certain amount
- A second motor vehicle
- A second home
- Family heirlooms over a certain value
- Collections such as paintings, coins, stamps and others
- Expensive equipment for use in a trade or business
Value Type Tied to Intended Use and Intended Users
Appraisers may be called upon to assist in determining various types of value, with the specific value type used depending, as always, on the intended use of the appraisal report and on the needs of the client and other intended users. (In bankruptcy, there are always intended users of the appraisal report other than the debtor. A number of third parties may rely upon the appraiser’s report in making their decisions including Trustees, creditors and the bankruptcy court.) Appraisal reports must be prepared so that they satisfy the needs of all those identified by the appraiser (in consultation with the client) as being intended users.
Individual Chapter 7. For various reasons, debtors, debtor’s attorneys and Trustees seldom require the services of an appraiser to determine the value of personal property for individuals filing for Chapter 7. “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 imposes new duties on debtor’s counsel,” said bankruptcy attorney Scott Borison. “Attorney’s now provide guidance and suggest methodologies by which debtors can ascertain the value of their personal property so the debtor is often successful at valuing his or her own property without the need for professional assistance. The type of value used by debtors when completing required schedules listing their assets is fair market value.”
The use of fair market value for an individual filing Chapter 7 is mandated by Section 522(a)(2) of the Bankruptcy Code which stipulates the meaning of “value” to wit:
“Value” means fair market value as of the date of the filing of the petition or, with respect to property that becomes property of the estate after such date, as of the date such property becomes property of the estate.
For a definition of fair market value for a Chapter 7 individual bankruptcy filing, one can look to the 1999 U.S. Bankruptcy Court (District of NH) case of Ivan E. Dore which states:
The word “value” as used in § 522 has a special meaning. Section 522(a)(2) provides, in pertinent part, that for purposes of § 522, “‘value’ means fair market value as of the date of the filing of the petition. … Fair market value is generally defined as the “price which a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy would agree after the property has been exposed to the market for a reasonable amount of time.”
Business Bankruptcies. Should appraisals be needed of business personal property for business bankruptcy purposes, it is normally the machinery and equipment appraiser who is called upon (often in association with a business valuator) to assist with developing opinions of value.
For a business Chapter 7 (liquidation) bankruptcy, appraisals are often not needed. The case Trustee can simply order the assets to be sold in order to satisfy creditors. The Trustee may negotiate a private sale for all the assets to one buyer, may sell the property piecemeal to a number of different buyers, or may hold a public auction.
For a business Chapter 11 (reorganization) bankruptcy “Which type and definition of value to be developed depends on how the appraisal will be used,” says machinery & equipment appraiser Carl Miceli, ASA, CEA. “For instance, a debtor of an ongoing concern under bankruptcy protection looking to obtain a bank loan using business assets as collateral might need to show orderly liquidation value on which a loan amount might be based.”
Explaining all the reasons underlying the selection of various value types for business Chapter 11 bankruptcy appraisals is well beyond the scope of this work. Suffice it to say that the appraiser could be called upon to develop opinions of forced liquidation value, orderly liquidation value, going concern value or even a reorganization value. Debt restructuring, obtaining loans using business assets as collateral, seeking creditor support for a reorganizational plan, or showing that a Chapter 11 (reorganization) filing is preferred over a Chapter 7 (liquidation) filing are all intended uses that will direct the type and definition of value to be used.
Communicate with the client to ensure a clear understanding of the intended use of the appraisal and the type and definition of value to be developed.
Fees for Bankruptcy Appraisals
If retained by the debtor, debtor’s counsel, or even an informal creditor’s committee formed to negotiate with the creditor, the appraiser makes his or her fee arrangement and payment schedule directly with the client. (It’s often advisable to obtain payment in advance prior to delivery of the appraisal report.) However, if retained by the Trustee, fee schedules must be approved by the Bankruptcy Court. In such cases, payment may be modified (if found to be unreasonable, for instance) and/or delayed.
© 2009 David J. Maloney, Jr., AOA CM