Can I Keep Jewelry in Bankruptcy?
One question we're often asked is whether a client can keep their engagement, wedding band, or other jewelry if they file for bankruptcy. The answer is "usually," but, as with most things, it depends on the details.
If you own the jewelry free and clear, meaning that it isn't security for a loan, the answer depends on how much it's worth and how much you can exempt.
I previously wrote a fairly detailed blog discussing "What Are Exemptions (or What Can I Keep in Bankruptcy)," which I recommend reading. While some states make a wedding band and engagement ring, regardless of value, fully exempt, meaning that you can keep them, even if they're worth a million dollars, Maryland does not have similar protections. In fact, Maryland has no specific exemptions for jewelry. Does this mean you have to turn over to the Trustee your wedding ring? Certainly not.
In a Chapter 13 case, you keep everything that you have, regardless of value and regardless of whether it is exempt. Read my blog, "What Can I Keep in a Bankruptcy" for a more detailed discussion of this. In a Chapter 7 case, jewelry is valued not at sale or replacement value, but at Liquidation Value. What is Liquidation Value? It's how much you can actually sell the item for. In the case of jewelry, this means how much a jeweler or pawn shop would pay for it, NOT how much you bought it for, or its replacement value. In most cases, this amount is so small that it will fit comfortably within your general exemptions.
If you bought the item of jewelry on credit and the creditor took a security interest in the item, does this mean that you have to give it up? Probably not. This is because of the economics of liens.
Liens survive bankruptcy. If you don't strip off or avoid the lien during your bankruptcy case, it continues through bankruptcy and has to be dealt with once your case is discharged. But what does "dealt with" really mean?
It means that before the creditor can actually require you to give up the item (or can take it), it must go through the following steps:
Hire (and pay for) a lawyer in the state where you then live;
The lawyer needs to file a specific type of lawsuit called a "Replevin Action";
A summons needs to be personally served on you (more money);
A hearing needs to be held or the Court needs to enter a default against you;
The creditor needs to hire someone to go to your house with a sheriff and take the item (more money);
The creditor needs to store and insure the item (more money);
The creditor needs to advertise that the item will be sold at auction on a particular date (more money);
The creditor needs to hire an auctioneer to sell the item (more money);
The creditor needs to pay the lawyer to file an accounting of all the money received and how it was allocated (more money).
By the time this process is over, a creditor would usually spend several thousand dollars at least. So, if the item won't sell at auction for at least enough to pay the out-of-pocket costs of the replevin action, it is very unlikely that the creditor will actually do anything other than threaten to do something. And even if the creditor decides to file a replevin action, I have usually been successful in working out a payment arrangement so that my client can keep the item.