Lessons From the Casey Anthony Bankruptcy

The Casey Anthony bankruptcy is a good illustration of the two immutable rules of bankruptcy:

1. Everything can be monetized.
2. If it can be monetized, the chapter 7 trustee will liquidate it.

In case you’ve been living under a rock for the last couple of years, the Casey Anthony bankruptcy case is as follows. Casey Anthony was accused of murdering her toddler daughter. Her behavior after her daughter’s disappearance could be described as lacking in good taste and sound judgment. She was tried for capital murder in Florida and acquitted. Her acquittal provoked outrage, since many in the media and on the internet believed that she was guilty. She went into hiding for about a year and emerged to file a chapter 7 bankruptcy. Her bankruptcy case has some important lessons for anyone who is considering bankruptcy.

The purpose of the bankruptcy system is to determine whether a debtor has any assets or income that is available to make a partial or full payment to their creditors. If there are available assets or available income, then the debtor must turn it over to a trustee. The trustee then distributes it to creditors based on their priority in bankruptcy on a pro rata basis. If, after this distribution, there is any remaining indebtedness it is usually discharged. There are some exceptions to the discharge, but most debt is dischargeable in bankruptcy.

Most debtors do not have enough assets or income available to make any kind of meaningful distribution to creditors; and so, their case is simply discharged as a no asset chapter 7. Their debts are discharged in full, and they go on with their lives. However, the lesson in the Casey Anthony bankruptcy is that “asset” is very broadly defined; and, the trustee has very broad powers to seize those assets.

Assets In Bankruptcy – A Brief Background

So here’s how it works. When you file bankruptcy, everything that you own that is not either fully secured or subject to an exemption becomes property of the bankruptcy estate. Now you don’t just own the stuff in your house. You have property rights and property interests that become property of the bankruptcy estate. Those property rights and property interests include the ability to turn something – even something intangible – into a valuable asset in the future.

For example, a real estate agent who files bankruptcy may have future commissions based on sales contracts that were signed before the bankruptcy but will not close until after the bankruptcy. That real estate agent can’t turn their future commissions into cash on the day they file bankruptcy. In fact, if the sale falls through, the real estate agent will never get that commission. But the right to the future commission is still property of the estate. If the sale fails to close, then nothing happens; because the property right was worthless. However, if the sale closes, then the real estate agent is entitled to the commission, and the property right had value. Even though the closing happened post-petition – after the bankruptcy was filed – the fact that the sales contract was signed before the bankruptcy means that there is a property right; and, that property right is property of the bankruptcy estate that the chapter 7 trustee can use for the benefit of unsecured creditors.

What This Means For Casey Anthony

Case Anthony apparently has no income and lives on the charity of friends and family members. However, she does have an asset. She has the rights to her story. You can sell the right to tell your life story. Most of us have very boring life stories. For instance, nobody wants to hear about that time I got out of a speeding ticket. However, Casey Anthony’s life story is valuable, because of the sensation surrounding her trial.

Evidently, she has not tried to sell the rights to her story yet; but that doesn’t matter. What matters is that on the day she filed bankruptcy, she had the right to sell her story. The chapter 7 trustee can take that right and sell it to the highest bidder, who can then publish the “exclusive authorized Casey Anthony life story,” turn it into a TV movie, etc.

If the chapter 7 trustee sells the rights to her story, it does not prevent her from telling her story. It just prevents her from profiting from it. For example, people like Casey Anthony are often paid to give interviews, particularly their first interview. If someone buys the rights to her story, then anything she receives for giving an interview is actually payable to the person who buys her story. She can give the interview, but she doesn’t get the interview fee.

Of course, the buyer can’t force her to write a book or give an interview. This means that the rights to her story are worth very little, unless she reaches an agreement with the buyer. For example, the buyer could offer her 25% of the net proceeds from an interview as an inducement to her granting an interview with a news outlet.

The buyer cannot, however, obtain some kind of blanket gag order that prevents her from ever telling her story in any form. That would violate her First Amendment right. She can pretty clearly tell her story to whomever she chooses, whenever she chooses. Purchasing the rights only means that any profit she derives from her story is payable to the owner of rights.

What This Means For A Potential Bankruptcy Filer

Very few of us have anything as sensational as the rights to the Casey Antony story. However, her case illustrates an interesting point. When you file bankruptcy, you expose all of your property, your property interests, and your property rights no matter how small or remote to liquidation by the chapter 7 trustee. This relates back to the two rules of bankruptcy I proposed earlier.

Everything Can Be Monetized

When you file bankruptcy, the case is about money. Specifically, the case is about whether there is money for your creditors. In effect, the trustee and the court will look at all of your assets and determine whether there is non-exempt value that is available to repay unsecured creditors.

Basically, everything has value. It’s just a question of how much. In order to monetize something, it has to have enough value that there is 1) a market for it, and 2) the market is willing to pay enough to make the sale profitable. That’s why you don’t see chapter 7 trustees selling people’s pet goldfish. The value of the pet goldfish cannot be monetized. Despite the market for pet goldfish, gold fish is not worth enough to actually produce value; and so, it cannot be monetized.

If It Can Be Monetized The Chapter 7 Trustee Will Sell It

Chapter 7 trustees are paid $60, plus a percentage of what they recover. The vast majority of debtors do not have any non-exempt property; and so, the chapter 7 trustee gets paid $60 per case, in most cases. This is a powerful incentive to find and liquidate non-exempt property. Filing bankruptcy and hoping that the trustee will not notice how much something is worth is a fool’s game. A chapter 7 trustee would not last very long if they couldn’t ferret out value to monetize.

A good chapter 7 attorney can spot potential assets before the case is filed and counsel the client about the risks that the trustee will liquidate property. One hopes – for the sake of her attorney’s malpractice premium – that Casey Anthony was adequately counseled on the risk that the rights to her story could be sold to the highest bidder. Actually, in a case like Anthony’s – I’m not sure why she didn’t file a chapter 11, sell the rights herself, and negotiate a plan with her creditors.

The casual reader may think that this wouldn’t have been an issue in a chapter 13 or a chapter 11. That, however, is not the case and one of several pitfalls for the unwary in bankruptcy practice. The reorganization chapters – that is chapter 13 and chapter 11 – both require that unsecured creditors either agree to their treatment under a plan or receive as much as they would in a hypothetical chapter 7. The principle of chapter 7 liquidation is applicable even when the debtor files another chapter.

You may, therefore, wonder why someone would file a chapter 13 or chapter 11, when they have to pay just as much as they would in a chapter 7. The answer is control. In a chapter 13 or a chapter 11, the debtor is generally able to control the liquidation of the asset. In a chapter 7, the trustee sells the asset without any input from the debtor. When you have a unique and valuable asset – such as the rights to your life story – you may be able to get a better deal for yourself by retaining control over the sale through a chapter 13 or chapter 11 reorganization than you would by letting the trustee sell the asset in a chapter 7.