A judgment debtor’s bankruptcy is usually bad news for a judgment creditor. However, when a crooked debtor with assets, vastly undervalues their assets, or fails to list them on their bankruptcy schedule; occasionally a creditor with assets, can make a bid on those formerly concealed assets.
This article is my opinion, and not legal advice. I am a judgment broker, and am not a lawyer. If you ever need any legal advice or a strategy to use, please contact a lawyer.
Bringing your debtor’s fraudulently hidden or vastly under-represented asset(s) to the attention of the bankruptcy trustee might interest them. The result of doing this might be to get your debtor’s bankruptcy dismissed. Although a long shot, you might be able to persuade the trustee there is a better option; to give you, the creditor, a chance to make a bid to buy those previously concealed debtor assets from the bankruptcy estate, occasionally for pennies on the dollar. The original bidding creditor is sometimes called a “stalking horse”. The amount you pay the trustee will go to the trustee and the BK creditors.
Successfully bidding for the judgment debtor’s formerly concealed assets to the bankruptcy trustee; depends on the unique circumstance of the judgment debtor’s shenanigans, the judge and trustee agreeing, and the judgment creditor having a solid plan and making a deposit.
Sometimes the best strategy starts with having the Sheriff transfer levied funds to the bankruptcy trustee and then wait for the debtor’s schedules to be filed and then try to buy assets that they have greatly undervalued or omitted from the financial schedules, minus any exemption amounts they might claim.
After discovering the value of the hidden or undervalued judgment debtor asset, one contacts the BK Trustee and says they want to buy that asset; after revealing it and its location. Trustees rarely do anything for a single creditor, except to obtain court orders so they can sell assets of the bankruptcy estate to them. Even then, the judge may decide that other creditors should have a chance to outbid you.
Many bankruptcy trustees (and most people) do not understand the real-world worth of (non-fungible) forced-sale assets and judgments. Most are shocked to learn cash upfront judgment values may be low, because (especially) post bankruptcy, most debtors are poor. Many judges and BK trustees will not let you buy the asset you discovered for pennies on the dollar, some will want to get at least 50%, not understanding the economic reality. You might get lucky.
Buying your debtor’s formerly undisclosed assets from the trustee at bargain basement prices is awesome when it works, however the circumstances must be exactly right. You need the debtor proving contempt toward the bankruptcy court, their hiding valuable assets from the court, and a willing judge and trustee.
Assets not previously declared or scheduled are usually, however not always abandoned and/or ignored by the trustee, even if they file a notice of abandonment and the bankruptcy is closed; and even if the debtor starts to use those assets.
You can make a bid to buy debtor assets you have discovered from the trustee, even if the trustee has not abandoned the property, and even if the debtor claims them as being exempt. If you make a bid for an undervalued asset (e.g., a personal vehicle worth $150K), then the debtor cannot successfully claim that is exempt, because that is far above the exemption limits. In California, a judgment debtor examination/ORAP lien often makes you a secured creditor in BK court, but even that does not guarantee you will be paid.
Nothing prevents you from bidding on any of the items in the bankruptcy estate that you would like to have, especially if the judgment debtor severely undervalues them (e.g., by more than 20 percent.) The debtor’s wild card exemption covers only $23,000 or so of stuff that is not already covered by another statutory exemption, so any bid amount you make will diminish that exemption’s power to cover their other undervalued assets.
If you bid $5,000 on an item that is worth $20,000, but which the debtor says is worth only $1,000, do not argue with them. Use that low valuation to bid on the asset. If the trustee accepts your $5,000 offer, the debtor will get the cash (after the trustee takes their 10% commission and pays their attorney fees) which leaves $4,000 of the debtor’s other stuff unprotected with a now-reduced wild-card exemption. Then, when their exemptions are all “used up” (i.e. spoken for) because their low valuations were ignored in favor of the higher amounts that you bid on the items you wanted, then you can petition the trustee to sell their other stuff that is not otherwise protected by exemptions. That will get the debtor’s attention.
To bid on a bankruptcy asset, a cashier’s check deposit for thousands will be required. The trustee will notify the other creditors that there may be a possible dividend. Creditors (including you) can file creditor’s claims. The trustee will then seek counter-bids (including from the debtor) to your bid for the asset. The high bidder (who might not be you) must then buy the asset. Your debtor might (amazingly) find post-petition assets to buy their asset back.
When your goal is to buy the formerly hidden bankruptcy asset you discovered; even when the circumstances are right, complications can arise, so please consult with a bankruptcy lawyer.
While one could begin with some sort of fraud-related motion (e.g., a 727), you do not want to share your found assets with the other creditors, unless you have to. If such a motion is successful, the bankruptcy may get dismissed, and other creditors can then attack the assets you discovered.
If you are allowed to skip the expensive adversarial motion route, and persuade the trustee and judge to let you buy the asset(s), you might get them at a great discount. The other creditors only get their share of the money you paid the trustee, minus expenses. If your purchase offer is approved by the court, you may get a rebate, because you are a creditor. The fewer creditors there are, the more your rebate might be.
If you have already recorded property liens against the judgment debtor’s property, then buying their “hidden” or “secreted” asset might be a way to make your debtor’s bankruptcy pay you more money than enforcing your judgment would have. The perfect scenario is when the court planned to value the asset at (e.g., $0). What then stops you from offering the trustee (e.g., $10K) for that asset in exchange for your (e.g., $250K) lien?
If the debtor has defrauded the bankruptcy court by not listing an asset, a creditor might have the right to make an offer to the trustee for that asset. The trustee might then choose to petition the court to accept your offer.
If your offer is approved, the trustee will petition the bankruptcy court to retain an attorney, reopen the estate, and notify the debtor that they now know about the asset(s) and the bankruptcy estate is asserting their ownership. Your debtor will not like this, but it is their own fault
At the hearing, you might say something like this, to the debtor’s side: “I am planning on buying this asset because you hid (or significantly undervalued) it from the court. Were you lying when you filed your schedules, or are you lying to the court now?”
Once you catch your debtor in a big lie about disclosing their assets to the court, you or your lawyer may have the right to challenge any subsequent orders allowing the debtor to amend their financial schedules. You could try asking the court to order that the asset you want sold to you, for a very steep discount, because you are a creditor of the bankruptcy estate.
If the debtor’s attorney objects, they can be reminded, “You know, counselor, subornation to perjury is a disbarment offense. You signed these schedules under oath, and your client has been caught in a significant lie before the court. Do you really want to press this issue?”. Such a bold, yet accurate statement may cause the attorney to withdraw their objection.