Items of Personalty

People fall deep into debt for many reasons. It could be due to a loss of income, miscalculating future income, improper spending habits, or major life event. To provide a fresh start, the founding fathers created the bankruptcy clause in the Constitution. The bankruptcy concept was further developed over the years to include various chapters and types of bankruptcy. Bankruptcy has become a viable option for individuals, businesses, municipalities, and there is a proposal for state bankruptcy in the works currently.

With respect to individuals, the bankruptcy code contemplates possible scenarios wherein individuals would be forced to pay certain items and absolved from paying other items. While each circumstance is case specific, this paper discusses items of personalty, or those items which are exempt from inclusion in a bankruptcy estate.

Note that there is a significant difference between a Chapter 7 and Chapter 13 bankruptcies, which are the two most common bankruptcies employed by individuals regarding what items became part of the bankruptcy estate. In contrast to Chapter 7 or “straight bankruptcy” wherein a debtor sells items to pay off debt, Chapter 13 allows a debtor to create a budget with the remaining money used to service the bankruptcy.

Chapter 7 Items of Personalty

Chapter 7 provides a debtor with a discharge provided that the debtor use items to pay off debt. A debtor may be compelled to sell personal items, with the proceeds from that sale to be used pay off creditors. Numerous athletes who have won championships and filed for bankruptcy have sold their championship rings to debt service creditors.

Suppose a person commissions an artist to hand paint pictures of himself, his wife, his children, and grandchildren. The artist charges the man $60,000 to paint the portraits, which the man agrees to pay. Everyday over the course of a summer, one family member sits in a chair while the artist tends to his craft. At the end of the summer, the artist finishes painting, touches up some of the pictures, and hands over hand painted pictures of the man’s entire family. The man pays the artist’s $60,000 fee and tips him an additional $2,000. The man then takes the paintings to someone to frame the pictures, for the price of $8,000. In total, the man spends $70,000 on custom hand-painted pictures, which the man displays in the rotunda of his foyer.

A few years later, the man’s business goes bad. Frantically and with intent to save his business, the man takes out loans to cover his business with a personal guarantee. The business continues to fail. When his business defaults on the loans, the banks go after him to pay. He is now saddled in debt with loans of over $2 million. To get out of debt, the man files for Chapter 7 bankruptcy.

The issue is whether the man has to sell the paintings, which cost him $70,000. While the pictures are impressive, the pictures are of his family, which does not have much value to other people. These are items of personalty, which are excluded from the bankruptcy estate so there is no obligation to auction off those paintings.

In debt? Contact the law firm of Melanie Tavare, a Bay-area bankruptcy attorney.