GemGuide offers the laws, chapters, terms, and values to keep in mind for a bankruptcy appraisal assignment.

Imagine a law that allowed a creditor to dismember the debtor if he could not pay his debt. This was a practice in the Draconian code,¹ well before Roman rule. However, the Romans changed the law to allow the debtor to give up all his goods to his creditors to get debt relief. The Latin banca rotta translates to "broken bench" (most likely referencing a workbench). Later the British altered it to be "bank" instead of banca and "rupt" instead of rotta.²

Bankruptcy is an appraisal assignment that has dual jurisdictional laws in the United States; there is federal law as well as state laws. Only federal law has complete jurisdiction, except in one aspect - that of value thresholds for exempted property, which is dictated by the states. "The Congress shall have the power . . . to establish a uniform rule of naturalization and uniform laws on the subject of bankruptcies throughout the United States."³

        Property Name?

The property involved in a bankruptcy is called the "bankruptcy estate."

        Trustee

A trustee will be assigned. One of the trustee's tasks will be to determine value. The trustee will first determine the value of the bankruptcy estate, usually with the help of an appraiser. "The trustee shall (2) appear and be heard at any hearing that concerns (a) the value of property subject to a lien."⁴

        Effective Date

The effective date is usually on the date of petition, although this may be changed, and the appraisal may need to be redone with a different date as the procedure proceeds.

        A Tale of Three Chapters⁵

Chapter 7 - Liquidation provides for a sale of assets to satisfy creditors.

Chapter 11 - Reorganization provides for a person to submit a plan to pay their debts.

Chapter 13 - Adjustment of debts of an individual with regular income; provides for a plan to pay debts.

The individual filing Chapter 13 must pay at least the amount he or she would have had to pay if they had filed under Chapter 7. In other words, the same value is used for both: " . . . the value, as of the effective date of the plan, of property actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under Chapter 7 of this title on such date."⁶

Antique gold and enamel pin with old cut mélange diamonds, owned by the author.

        Value

A word of caution is needed here. An appraisal must comply with the law. Although almost all resources, courses, publications, etc., state this, they then advise a value that is not in compliance. For example, "A forced liquidation is used to determine value when the owner needs to convert property to immediate cash without allowing proper time for advertising and sale. Typically, forced liquidation appraisals are required for those facing time deadlines, such as being under a court order or bankruptcy."⁷

Is forced liquidation proper for bankruptcy? Personal property appraisers have generally used forced liquidation as a basis for valuation. This may come from the fact that Chapter 7 is called "Liquidation Bankruptcy." For example, "Chapter 7 is called Liquidation Bankruptcy. Under this chapter, a debtor's non-exempted property and assets will be identified and sold in a forced or orderly liquidation."⁸

Wait! Generally, fair market value will be the required value definition. "(A) In this section, (2) 'value' means fair market value as of the date of the filing of the petition or, with respect to property that becomes property of the estate after such date, as of the date such property becomes property of the estate."⁹ "The court believes that it should start with the fair market value of the property as that term is generally understood to be, i.e., the price which a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy would agree upon after the property has been exposed to the market for a reasonable time. The court should not use that value which would be obtained through a forced or quick sale."¹⁰

Bankruptcy is an assignment where the appraiser will be expected to render a dual-value appraisal. The trustee will need to know several pieces of information that an appraiser can provide. Fair market value may be mandatory, but the trustee often needs to determine the best approach to turning the bankruptcy estate into cash in a specific time frame, which markets are available for selling the property, the time spans involved with each market, and whether the market might be considered fair market value. The alternate value is the orderly liquidation value. Sometimes, especially with used items, these may be the same. If there is enough time involved, the buyers and sellers knowledgeable, and other elements of fair market value are met, then they are the same. In most cases, the most appropriate marketplace for used items will provide a value that is both fair market and orderly liquidation value.¹¹

If a debtor wanted to keep the bankruptcy estate property and paid the value that they would have to pay to purchase the property, several courts settled for a midpoint between "replacement value" and "foreclosure value" standards. The reason for the variance was a portion of the code that asserts that value " . . . shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property."¹²

However, all bankruptcy courts must use the replacement value standard. But what is the replacement value standard?

The only valuation case that the U.S. Supreme Court has ruled on published the following: " . . . we hold, the value of the property (and thus the amount of the secured claim under § 506(a)) is the price a willing buyer in the debtor's trade, business, or situation would pay to obtain like property from a willing seller."¹³

In that case was a footnote adding further clarity: "By using the term 'replacement value,' we do not suggest that a creditor is entitled to recover what it would cost the debtor to purchase the collateral brand new. Rather, our use of the term replacement value is consistent with the Ninth Circuit's under standing of the meaning of fair market value; by replacement value, we mean the price a willing buyer in the debtor's trade, business, or situation would pay a willing seller to obtain property of like age and condition."¹⁴

        Get Paid

Appraising property in a bankruptcy means being compensated because someone else failed financially. Always be certain there will be payment.

Written by Bill Hoefer