There is a persistent myth that debtors lose most or all of their property when they file bankruptcy, but most states have very generous bankruptcy exemptions, which means that the opposite is true, and most debtors get to keep most or all of their property.

Both Illinois and Indiana mostly use value-based exemptions as opposed to asset-based exemptions. For example, both states allow debtors to exempt a certain amount of home equity instead of a certain number of homes. So, accurate valuation is essential.

The Process

The Bankruptcy Code requires debtors to list the as-is cash sale value of all their assets, usually in either Schedule A or Schedule B.

Only the economic value is listed. This process is different from valuing assets in a personal injury case, because in that context, a family car is worth more than a car that sits in the garage most of the time, because emotional value is part of the asset’s overall value.

The trustee (person who manages the bankruptcy) reviews and approves asset valuations in both Chapter 7 and Chapter 13 bankruptcies. The trustee has a legal duty to act in the best interest of the creditors. So, although the trustee is not technically a moneylender’s attorney, the trustee is not exactly a neutral party, and the trustee is certainly not on the debtor’s side.

As-Is Value

Anyone who has ever held a garage sale knows that items are valued at pennies on the dollar. Items are priced to sell quickly and not priced according to their intrinsic value. The same thing is true in bankruptcy, and a house is a good example.

In many cases, the starting value for a valuation is the tax appraised value, but this value is nearly always greatly inflated. A better starting point is the amount of money that a home investor would pay for an as-is cash sale with no inspection, because that is the essence of “garage sale value.”

As a rule of thumb, home investors will pay up to 60 percent of the fair market value. But even this figure may be a little high for bankruptcy purposes, because no good negotiators present their best offer right off the bat. Instead, the initial offer may be closer to 40 or 50 percent of the fair market value.

The trustee will almost certainly object to a declared value this low. So, the best idea is probably to obtain at least one written offer from a home investor, and this offer arguably sets the garage-sale value for that particular home.

Collateral Considerations

Earlier, we mentioned that all trustees have a duty to act in the best interests of the creditors. Sometimes, that means not seizing and selling a nonexempt asset.

Assume Daniel Debtor has a partially-running car in his garage; this item is not exempt. In order to sell the car, the trustee would first have to tow it from Daniel’s house, make enough repairs to make it attractive to buyers, and store it before the sale. All these things cost money, and these expenses may well consume most, or all, of the money that the creditors would get from the car’s sale. In this case, it is clearly not in the best interests of the creditors for the car to be sold, and Daniel will probably get to keep it even though it is not exempt.

Count On Experienced Attorneys

A comprehensive bankruptcy strategy must include accurate asset valuation. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We handle cases in both Indiana and Illinois.