Tangible Personal Property in Bankruptcy Cases
What might happen to tangible personal property is a frequent inquiry we receive from individuals considering a bankruptcy filing. Tangible personal property is distinct from real estate or intangible assets such as financial instruments, receivables, intellectual property, etc. In the reorganization chapters of chapter 11 and chapter 13, the tangible personal property is protected from liquidation along with other assets. The value of tangible personal property may impact the the amount of required repayment to creditors in the reorganization chapters of 11 and 13.
In chapter 7 bankruptcy there is the potential for the loss of assets. A registered entity such as a corporation or LLC is not permitted to exempt any of its assets. A debtor who has not lived in North Carolina for at least two (2) years may be required to claim the exemptions available under the bankruptcy code or the exemptions of a state where they resided previously. The following information relates to individual debtors who have lived in North Carolina for at least 2 years prior to the filing of bankruptcy in North Carolina.
- The debtor is permitted to protect five thousand dollars ($5,000) in value plus one thousand dollars ($1,000) for each dependent of the debtor, not to exceed four thousand dollars ($4,000) total for dependents, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.
- The debtor is permitted a five thousand dollars ($5,000) in value in any asset the debtor owns but the amount claimed is deducted from the homestead exemption.
- The debtor is permitted to protected two thousand dollars ($2,000) in value, in any implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor.
- The debtor is permitted to protect professionally prescribed health aids for the debtor or a dependent of the debtor.
- The debtor is permitted to protect three thousand five hundred dollars ($3,500) in value, in one motor vehicle.
The amount that the debtor is permitted to protect is that of the equity. So if a vehicle is valued at thirty thousand dollars ($30,000) but is subject to valid lien in the amount of twenty seven thousand ($27,000) then the vehicle will be protected from liquidation if the debtor applies the motor vehicle exemption to the vehicle. If the case is jointly filed with a spouse then each debtor is permitted to claim the exemption.
If an asset is jointly owned with a non-debtor than only the debtor’s interest must be claimed as exempt. If the overall value of the asset exceeds the amount claimed as exempt and the asset is liquidated by the chapter 7 trustee then the debtor must be paid the exemption amount in cash.
The valuation of the asset is the resale value of the item based on age and condition as opposed to the purchase price or replacement value.
Not all tangible personal property will qualify as a household good. There must be a functional nexus which provides that an item qualifies as a household good when it is used to support and facilitate daily life within the house. Pots and pans would serve that purpose but a model car collection would not. There is a bankruptcy court opinion from the Raleigh Division of the Eastern District of North Carolina holding that a coin collection is not a household good. Items contained in storage units and rental properties may be more vulnerable to an objection to exemptions under the household good exemption then items that are in the debtor’s residence. The exemptions, other than for professionally prescribed health aids, are inapplicable with respect to tangible personal property purchased by the debtor less than 90 days preceding the bankruptcy filing unless the purchase of the property is directly traceable to the liquidation or conversion of property that may be exempt and no additional property was transferred into or used to acquire the replacement property.