Dear Bankruptcy Adviser,
I’m in the process of getting ready to file for Chapter 7 bankruptcy. I have been current on my house and car payments. There is not any equity in the house as I now owe more than it’s worth due to the current market. So, in filing, do I need to list the house and vehicle, although I don’t want to risk losing them?
You ask a very common question. Since the collapse of the mortgage industry, many people think that they do not have to list a home with no equity. This is a very serious mistake and one that I hope you will not commit.
All of your personal or real property (i.e., your car and home) is used to create an “estate.” Your estate has specific items that can or cannot be taken from you to satisfy your obligations to creditors. Failing to list all parts of your estate will only delay or possibly eliminate your right to Chapter 7 bankruptcy protection.
Once you file, even if your case is dismissed, the bankruptcy filing will stay on your credit report for 10 years. Therefore, don’t intentionally damage your credit rating while failing to get the relief you may deserve.
To obtain bankruptcy relief, you must disclose all your assets and liabilities. You are filing a federal document that requires full disclosure. In fact, when you go to your hearing 30 days after filing your petition, you will see a sign posted on the wall that states: Bankruptcy fraud will be reported to the FBI.
Your goal is for the person who is assigned to review your petition and schedules, known as a “trustee,” to flip through the pages and see that you qualify for bankruptcy protection. The trustee must know the value of all your assets. Typically, you do not need to list how many towels or forks you may own. But failing to disclose all information will only mean that your petition will face tougher scrutiny than if you had disclosed everything from the beginning.
Your 10-year-old dog is an asset — even if he or she has no marketable value. Airline miles are an asset of your estate. Current or potential lawsuits are assets. And the money you owe your mother is a liability, even if you plan to pay her back after filing bankruptcy. Depending on the state in which you live, you could be required to turn over cash you have in your bank account, cars that are paid in full or even your current vehicle with limited equity.
Each state allows you to protect a certain percentage of your assets. This is known as “exempting” assets. The amount you can exempt varies from state to state. In some states, you can exempt 100 percent of your home’s equity, while only protecting a few thousand dollars of equity in your car or money in your bank account. As a result, you can keep your home, but you may have to give up your car. The car will be sold, with proceeds going to creditors, and you will be left looking for another way to get to work.
Failing to list your car will raise many questions when the trustee reviews your case. Beyond the obvious of how you will get to work, what if you are paying car insurance or $400 a month in gas? The trustee will wonder why you are paying car insurance and buying gas, yet you have no car!
People constantly try to defraud the bankruptcy system. Recently, I was called by an attorney. He said that he has proof that a former Chapter 7 debtor failed to list his home as an asset in his petition. The trustee assigned to the case did not uncover the house, but this attorney did — five years later! Since then, the trustee originally assigned to this debtor’s case was notified and it is possible that the case will be reopened. Unless the debtor can explain this major failure to list an asset, he likely will be having long conversations with the FBI.
The lesson is simple: Make sure you disclose all your assets, no matter how trivial you may think they are. Err on the side of overdisclosure rather than trying to hide assets. Even if you get away with lying, your case may never be over.
Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “bankruptcy” as the topic.