By Ryan C. Wood

Well, there really is no real good answer except do not intentionally undervalue the stuff you own. Value is in the eye of the beholder? Yes, sometimes that is true. Most of the time you just do the best you can and provide the fair market or replacement value of the asset. I do not know how much your used stapler that you bought in 1992 is worth. What about your house? The best we can do is look at comparable sales and how the market is at that moment in time. If the market is hot, like it is in San Mateo County, the listing price could be bid up by thousands of dollars. So was the house worth what it was listed for or what the house sold for?

Be Careful Filing A Chapter 7 Bankruptcy Case If The Client Owns A House

In the Bay Area and San Mateo County home prices are on the rise. So if you own a home and the value is close to what you owe be very careful filing a Chapter 7 bankruptcy. California has generous homestead exemptions to protect equity in primary residences, but what if there is a bidding war on the house and the price is bid up by twenty thousand dollars? Will you still be able to protect the equity and keep the house or will the house be sold out from under you in the chapter 7 bankruptcy case? The Chapter 7 Trustee assigned to the case will want to list the house for sale and let the market determine the value and see what happens. The Chapter 7 Trustee has a duty to administer the bankruptcy estate and liquidate unprotected assets for the benefit of creditors. Liquidating and disbursing funds to creditors is also how chapter 7 trustees make more money. Chapter 7 trustees get paid a percentage of the assets disbursed to creditors. So not only does the chapter 7 trustee have a duty to investigate your assets and liquidate them, but they have a financial interest in liquidating unexemptable assets also. If the chapter 7 trustee does seek to list the property for sale you can try and buyout the bankruptcy estate, oppose the listing of the property for sale or convert the case to Chapter 13 and pay the equivalent unprotected equity to creditors over 3 or 5 years to make sure you keep the home.

Do Not Intentionally Undervalue Your Assets

So after reading the preceding paragraph you may have the thought that you can just decrease the value of the asset to an amount that can be protected. Please delete that thought and never think it again. It is a dangerous game to play if you choose to manipulate the value of your assets. Just ask Jesus Bencomo. Mr. Bencomo filed for bankruptcy protection under Chapter 7 of the bankruptcy code for the first time in May of 1998. No real property was listed in his first bankruptcy case. On January 16, 2013, Mr. Bencomo’s bankruptcy lawyers filed his second Chapter 7 bankruptcy case listing in Schedule A that he owned real property located in Norwalk, California. Mr. Bencomo valued the real property at $175,000 with secured debt totaling $145,879. So there is approximately $29,121 in equity to protect. After the conclusion of the 341(a) Meeting of the Creditors the duly appointed Chapter 7 Trustee Wesley Howard Avery filed a motion with the court to employ a real estate broker to list and sell Mr. Bencomo’s house.

The trustee’s motion provides the value of the Norwalk property as around $305k to $333k. Two weeks later Mr. Bencomo’s bankruptcy attorneys amended the Schedule A to list the value of the Norwalk property as $245,000 with secured debt now totaling $214,929.27. Eventually the court approved the employment of the real estate broker.

The Chapter 7 trustee also filed an adversary proceeding, lawsuit in conjunction with the main bankruptcy case, objecting under Section 727(a)(2)(A) and (a)(4)(A). Section 727(a)(4)(A) provides that the debtor’s discharge may be denied where: (1) the debtor made a false oath in connection with the bankruptcy case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently. Retz v. Sampson (In re Retz), 606 F.3d 1189, 1197 (9th Cir. 2010) (citation and internal quotation marks omitted). The adversary proceeding complaint alleges that Mr. Bencomo is an experienced real estate broker and therefore knew at the time of filing that the value of the Norwalk property was in the $300k range. Basically the Chapter 7 trustee is arguing Mr. Bencomo knowingly and intentionally undervalued the Norwalk property. Mr. Bencomo’s conduct in his first bankruptcy case became an issue in the second. Apparently Mr. Bencomo transferred the house out of his name, than back into his name, but failed to record the deed until 2002 and he failed to list the property in his first bankruptcy petition. Evidence of Mr. Bencomo’s prior bad conduct in the first case can be used in the second as impeachment evidence. So, the court ruled in the chapter 7 trustee’s favor and held that Mr. Bencomo knowingly made a false oath regarding the value of his house and that this is material. Mr. Bencomo was denied a discharge.