Equity Protection #5

The job of the lawyer is to protect the equity a debtor has in his property.

A prospective client comes to you and wants to file bankruptcy. The client has debts he would like to be made go away ( discharged). That is the benefit to the client. The burden to the client is that the bankruptcy court ( through the bankruptcy trustee) may sell the unprotected equity in property the debtor holds. The sale proceeds would go to pay off the client’s debt.

The job of the lawyer is to protect the equity a debtor has in his property. This is done through the State’s exemptions that give a dollar value to how much equity can be protected.

Let us use the California State exemption found at California Court of Civil Procedure Section 703.140(b)(2):

“The debtor’s interest in one or more motor vehicles is $5,850”.

This means that a bankruptcy debtor may exempt ( or shield from a bankruptcy trustee up to $5,850 in one or more motor vehicles) if the debtor claims the CCP 703.140(b)(2) code section.

Remember we are talking about equity in an automobile, not the total value of the vehicle.

For example: If you have a car worth $10,000 that has no debt against it, you could go to CarMax’s auto purchase department and sell the auto for $10,000. You would keep the money. The equity you had in the auto was $10,000 and that is the amount you would keep.

If the car was worth $10,000 and you owed the finance company $5,000, then you would have $5000 in equity in the vehicle. The same analysis applies. You sell the auto to CarMax for $10,000 and then you pay the lender $5000 and you keep the equity (or to say it another way, the amount that you own) amount of $5000.

Now take this to the bankruptcy context. If the debtor owned a car worth $10,000 and owed $6000 to the lender. The car would be said to have $4000 in equity.

( $10,000 value - $6000 owed = $4000 equity)

The bankruptcy trustee could sell the car for $10,000, pay the lender $6000 and then use the $4000 to pay off a portion of the the total creditor body’s debts owed by the debtor.

However the State of California’s Legislature has said that anyone who files bankruptcy may claims CCP 703.140(b)(2) can protect up to $5,850 in equity in a vehicle. The State Law protects the debtor from the trustee getting less that $5,850 in the vehicle.

Here the trustee would be prevented from selling the car, since the $4000 in equity would be protected by the $5,850 protection afforded by the State of California.

Again, the job of the lawyer is to protect the equity a debtor has in his property.