The liquidation alternative test is a somewhat confusing aspect of bankruptcy law. It requires debtors to repay unsecured creditors for any amount above the exemptions allowable for their property. Let me give a basic example.
Let’s say your house is worth $100,000 and it is owned outright with only you on the deed. With no mortgage or any other liens, you have $100,000 in equity. Under the bankruptcy code, you can exempt roughly $25,000 of this equity. This leaves $75,000 in equity that is not exempt. If you were to file a Chapter 7 bankruptcy in the scenario , the United States Trustee could theoretically liquidate your house and use this $75,000 in unexempt equity to pay your creditors! Obviously, this is not a good option.
The alternative to liquidating your home would be paying back your unsecured creditors up to the $75,000 in unexempt equity. Now, in this example , that may prove to be impossible as it is a lot of money to repay. However, in many examples the unexempt equity is much less. Let’s try a different but similar scenario.
Let’s say your home is still worth $100,000, but you also have $40,000 remaining on your mortgage. You also have a $10,000 tax lien . Finally, let’s say that you have a $15,000 home equity loan. That is $65,000 in liens on your $100,000 home. If this scenario you have $35,000 in equity of which $25,000 can be exempted. That leaves $10,000 in unexempt equity under the liquidation alternative test. In this scenario you can repay up to $10,000 to your unsecured creditors to satisfy the test.
If you owe $75,000 to your unsecured creditors, the balance of $65,000 is discharged in the chapter 13 bankruptcy.
So, it will be very important to determine several things when looking at the liquidation alternative test. The easiest thing to determine is what you owe. You can simply do that with mortgage statements and tax statements. The trickier thing to figure out is what your home is worth. That may require a formal appraisal or a realtor assessment. Once you have both of those numbers, it will be easy to determine.
It should be noted, the liquidation alternative test does not just apply to real estate. Any property that you own that goes beyond your ability to exempt it is potentially an issue. This may include cars that are owned outright, savings in a bank account, collectibles or antiques, or basically any other property. However, homes are the most common issue.
If you were considering filing bankruptcy, call us at 412-414-9366 to set up a free consultation , I would be happy to sit down and determine if the liquidation alternative test or anything else will be an issue with your filing.