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How is unprotected equity from property determined in the liquidation analysis?

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  • How is unprotected equity from property determined in the liquidation analysis?

    I have spoken w/ several bk attnys and have recved different ways to determine non exempt assets. I have found the following ways that varied over different attnys....

    a) APPRAISED VALUE ADJUSTMENTS
    1) some apply a single 'fudge factor' to the appraised sales value of the property to get the costs associated w/ the sale price - I have seen 9 pct used and 10 pct used as the single fudge factor. this includes the std 6 pct broker fee plus unspecified sundry costs adding up to about 4 pct)

    2) some apply itemized costs attempting to cite every cost as low in granularity as termite inspections to putting in fees for anticipated litigation challenges for properties w/ others on title ( applying subsection 363(H) that others living in the home who are on title should not be harmed from the sale of the property).

    I will add - the itemized method seems correct since it is supposed to EMULATE a real ch7 liquidation process. If you are kicking out several people from a jointly owned home for the debts of one titleholder, you can reasonably expect a challenge in court which will cost $.


    EXAMPLE

    180k appraised value

    a) 1 - less 10 % = 162k
    a) 2 - sum of a bunch of granular costs = 13.6% = 155.5k

    a) 2 - is obviously a better way . Is it always a better way? and why wd some attnys do a).1 vs a).2?


    b) APPLYING THE STATE BK EXEMPTION AMOUNT

    1) some have applied ( subtracted) the state exemption amount right after subtracting the mortgage from the appraised value adjustment above ( a) before the bk filer portion is determined ,

    and

    2) some have applied ( subtracted ) the state exemption amount ONLY to the bk filer's portion after it has been calculated

    For (b) WHen you do it like (2) - only to the portion of equity that is the filer's - it is alot more REDUCED equity than doing it before this determination
    I will add - THIS to me is teh logical and sensible way to do this. THe state exemption is PER FILER ; therefore it s/ only be applied to the filer's portion.


    EXAMPLE

    180k appraised value jointly owned property , single filing bk ( spouse not filing)

    Let's say we are using the 10 pct fudge factor method, which gets us 162k; mortg = 122k; gross equity = 162-122k = 40k

    The b.(1) group applied the IL state exemption (15k) right now to 40k = 40-15=25, THEN did the equity share to the filer ....25 /2 = 12.5k unprotected equity

    The b.(2) group first determined the filer's share of the gross equity , THEN applied the IL state exemption (15k) to the FILER's share. To wit: 40k gross equity / 2 = 20k equity to each titleholder, including the bk filer, and then the 15k state exemption is then applied to filer's share ....20-15 = 5... BIG DIFFERENCE between 5k and 12.5k ( curiously, it is exactly half of the 15k state exemption for one filers)

    SO some bk attyns do it one way and other do it the other way. Is there a standard correct way for the northern district of IL? Why wd would they do it differently, especially when it ican be worse for the bk filer?
    Last edited by rayrod; 08-04-2017, 12:29 AM.

  • #2
    I don't think there is a standard way any more than 2 appraisers can come up with different values based on several methods. In the end, it comes down to what is defensible with best evidence of value.

    Why are you so concerned about the valuation model? It usually doesn't matter how because valuation of the home is typically not an issue except if the Trustee is interested in a sale. How the valuation was created typically only matters if it is challenged.
    Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
    Status: (Auto) Discharged and Closed! 5/10
    Visit My BKForum Blog: justbroke's Blog


    I am not an attorney. Any advice provided is not legal advice.

    Comment


    • #3
      thanks for getting back. Let me clarify: I was not talking about the valuation model (comparable, capitalization, cost replacement, etc) for appraised value, but the way ADJUSTMENTS are made AFTER the appraisal. Yes, I understand that there are different methods to get the appraised value. Note in my example, I used the same appraised value ( 180k), then showed how applying the state exemption at a different time yields a big difference in final unrpotected asset value.

      Further, this is not some idle academic exercise, as I have had different attnys tell me they'd employ one method or the other; and only saw one that employed the 2nd method (better for debtor) for both aspects. I am not thinking of doing this pro se, myself, but I want to choose the attny who will get me the lowest number AND a confirmation.

      I was wondering if perhaps some attnys use one method over the other because it increases the odds of a confirmation. Just a speculation. maybe it ties in w/ our income? ( fyi, we are UNDER the median in our state).

      But back to the replier -- yes, what is DEFENSIBLE is the final arbiter. Perhaps it is more defensible to one way vs another?

      Unfortunately, because of the constraint of the single 'free consult' , I cannot ask these followup questions to the attnys. They dont answer the calls. I just stumbled upon this excellent forum and it allows us to explore these gray areas.
      Last edited by rayrod; 08-04-2017, 12:50 AM.

      Comment


      • #4
        For the purpose of Chapter 7 reconciliation in reorganization cases, such may depend upon where you are filing. For example, in Arizona cost of sale is typically not considered in the context of a Chapter 13 but is considered in the context of a Chapter 11.

        As it relates to a Chapter 7 the debtor's opinion is not very relevant. If the debtor calculates $x non exempt value but the Trustee thinks it's $y you can bet the Trustee's value is going to rule the roost. The end game is whether or not the Trustee thinks he/she can sell the asset, pay the debtor the allowed exemption, pay himself and then have anything left over for unsecured creditors. If the Trustee thinks the answer is "yes" he/she will try to sell the asset regardless of what the debtor says or thinks the value is.

        Des.

        Comment


        • #5
          Originally posted by rayrod View Post
          thanks for getting back. Let me clarify: I was not talking about the valuation model (comparable, capitalization, cost replacement, etc) for appraised value, but the way ADJUSTMENTS are made AFTER the appraisal. Yes, I understand that there are different methods to get the appraised value.
          I used that only as a strawman and example. As Despritfreya writes, a lot has to do with local rules and most of it is really how the Trustee computes "their" value. Then the argument ensues over who has the correct valuation.

          Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
          Status: (Auto) Discharged and Closed! 5/10
          Visit My BKForum Blog: justbroke's Blog


          I am not an attorney. Any advice provided is not legal advice.

          Comment


          • #6
            I think you are right to choose an attorney who will use the method that results in the lowest valuation, assuming using the higher value means you will have to adjust your budget to show enough DMI to pass the liquidation test, resulting in a higher plan payment. You want to present the best plan for you. If the trustee doesn't object to the value, great. If he does object, you'll have the lower value as your starting negotiation position and an attorney who will stand behind it. But be prepared for the possibility that the final value may be much different than what you use on your petition and might be a more arbitrary number based on negotiation. JB's example could be very relevant. You are focused on how the market value is adjusted. It could turn out that the point of contention becomes the market value you start with. Your petition may not even show how the value was determined.

            If your plan payment will be the same either way, there's not much point in worrying about it.
            Last edited by LadyInTheRed; 08-04-2017, 12:13 PM.
            LadyInTheRed is in the black!
            Filed Chap 13 April 2010. Discharged May 2015.
            $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!

            Comment


            • #7
              Thanks for the replies. to be clearer .. I am in the northern district of IL.. I note that the overall gist of the replies is --- what is 'correct' is dictated by the ch13 trustee and their MO / approach, which varies by district. A question then bubbles up: So how might one discern how it is done in the district? answer: Use an experienced attny in this district who knows what wd sell / confirm and what wd not, I suppose. But I found that different experienced attnys use different methods...

              Despritfreya above said : 'in Arizona cost of sale is typically not considered in the context of a Chapter 13 '.
              --Since every attnys* I have spoken with has adjusted the initial appraised value w/ sales costs, this is apparently allowable, acceptable and done as a norm by ch13 trustees in this district. I just noted a few different ways these adjustment were done by attnys that had significant effects in the final unprotected asset number and hence the monthly amt I 'd have to come up w/.. In the end , it depends on how the ch13 thinks, I guess.

              LitR said: 'Your petition may not even show how the value was determined. '
              -- I have a certified appraisal from a licensed appraiser that I paid $450 for that will be included in the petition which shows the derivation of its final value. In reality, we all know that this is an estimate and hence so much fiction as the real value is what someone DID pay for in a specific time. The ch13 trustee can have her fiction too - IF she really wanted.

              The question to this forum is -- how much / often does the ch13 trustee object in this way? Realize this is not some multimillion dollar property and a person w/ 6 figure earnings, but a 180k house , jointly owned, for a HH well under the state median for our HH size. Wd the trustee be so motivated to try to figure out a way to blow up the whole deal where the creditors wd get 100 pct of our DMI --and then the creditors wd get nothing and certainly the debtor wd not get a chance at a 'fresh start', the aim of the bk law ? The COULD do this if they wanted to do this. WOULD they?


              DMI = disposable monthly income, correct?

              *All attnys I have seen have had lots of years of experience doing this in this district. In fact, I did hear you above that it does not depend on what the debtor's opinion is on what the value it, I was wondering to what extent the reputation of the debtor's counsel might effect the persuasiveness.
              Last edited by rayrod; 08-04-2017, 03:15 PM.

              Comment


              • #8
                Originally posted by rayrod View Post
                TThe question to this forum is -- how much / often does the ch13 trustee object in this way? Realize this is not some multimillion dollar property and a person w/ 6 figure earnings, but a 180k house , jointly owned, for a HH well under the state median for our HH size. Wd the trustee be so motivated to try to figure out a way to blow up the whole deal where the creditors wd get 100 pct of our DMI --and then the creditors wd get nothing and certainly the debtor wd not get a chance at a 'fresh start', the aim of the bk law ? The COULD do this if they wanted to do this. WOULD they?
                Apologies but I didn't even notice that this was posted in the Chapter 13 forum.

                As I will now say, and as Despritfreya has written, Chapter 13 Trustees don't care about this. It's almost meaningless in the Chapter 13 context. Chapter 13 Standing Trustees rarely want to deal with selling property. In a Chapter 13, any property that you want to keep, you just need to follow the Chapter 7 Liquidation Test (a/k/a "best interest of creditors test"). Once you have the number from that test, you must ensure that the unsecured creditors, in the Chapter 13, receive at least as much of what the test reveals, at a minimum.

                This whole thing is really moot unless you're trying to actually get rid of the property.

                Debtor's counsels are not persuasive if it came down to a valuation hearing. Evidence is persuasive.

                I'm wondering what this question is really about because we never get into these discussions with Chapter 13s. Again, as Despritfreya opined, this is not even a consideration in a Chapter 13. You just must follow the liquidation test and that test does not consider "cost of sale" or anything else related to the preparation, sale, commission or anything else related to property sold.


                Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                Status: (Auto) Discharged and Closed! 5/10
                Visit My BKForum Blog: justbroke's Blog


                I am not an attorney. Any advice provided is not legal advice.

                Comment


                • #9
                  Thanks again for responding. YEs, I intentionally put this in 'everything ch13' since I aint selling the place. I s/ have titled the thread , ' How is unprotected equity from property determined in the chapter 13 liquidation analysis?' So... back to the ch13 liquidation test..justbroke said 'test does not consider "cost of sale" or anything else related to the preparation, sale, commission or anything else related to property sold.'

                  This cd be true in your area, but in my district , northern district of IL, it most definitely IS considered . How do I know ? In my q-a w/ several bk attnys , all of whom were well practiced in this area and district, adjusted downward for the valuation for sales costs before subtracting the more familiar mortgage amt.

                  What prompted this thread was that among the people I queried, and I queried upwards of perhaps 8 - only telling you so that you dont think I found an outlier -- I found two differences in how they do this... one uses a fudge factor approach , adjusting by 10 pct and the other was using an itemized approach, which yields more , as you might expect.

                  As you point out , the law only says ' creditors need to get at least as much as they wd in a ch7 liquidation' (it doesnt get down to the specific subtract thus and such and thus cd vary by district)... so..... I WOULD THINK for ch13, the liquidation analysis is not only not moot, but is critical and should be done in the same manner as is done in a ch7 -tho the stakes are not the same. in ch13 it only determines the monthly amt . the monthly amt and accuracy is what I care about.

                  SO among the people who have done bks , please think back in htis liquidation test and see if you can recall how it was done.

                  Comment


                  • #10
                    Regardless of the bk district, sales costs would have to adjust what is netted out to the creditors in a ch13 as ch13 is supposed to follow a ch7 liquidation, but in the abstract.

                    It should do similar things as a ch7, money and numbers wise. So, to get the sale, the seller , the ch7 trustee, would have to pay real estate taxes, the last water bill, state taxes, termite inspection/certificate, perhaps a few other things. At closing, there must be a 6 pct broker check cut. ALl these redeuce the original sales price and after this is netted out, THEN the mortgage has to be paid. This would result in gross equity from the house.

                    But if it is jointly owned house and the debtor is filing singly, which is the case w/ me, then the debtor's share of the equity needs to be found by dividing this equity by two . spouse wd get half of this equity and I would get the other half. On this other half, I would apply my state exemption - in IL it is 15k .

                    After this is done, thiis result wd be what the creditors finally get.

                    In ch13, they wd AT LEAST get this number PLUS any disposable monthly income.

                    Comment


                    • #11
                      Instead of going though this "exercise" why don't you simply put the lowest possible value on the asset that you can justify and then wait to see if someone objects? Maybe no one will question what you are doing. Worse possible outcome - value is higher and you have to pay your creditors more if you want to keep the asset.

                      Des.

                      Comment


                      • #12
                        That's why they always say that the true "price" for something is what a willing buyer is willing to pay a willing seller. In the end, it's all about what will fly by.

                        As to whether people add fudge factors or adjust, they do this just to show the Trustee that it is a worthless pursuit. This fudged value doesn't change the value of the property. On my Schedule A I have to list the current market value, not the liquidation value. If I'm fighting with the Trustee, I fight over the liquidation value (which I would include the cost to sell and other factors).

                        As Des wrote, make an "offer" and see if the Trustee will "buy" your price. That's the only true test.
                        Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                        Status: (Auto) Discharged and Closed! 5/10
                        Visit My BKForum Blog: justbroke's Blog


                        I am not an attorney. Any advice provided is not legal advice.

                        Comment


                        • #13
                          thanks for the replies. Sounds like good advice.

                          Comment

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