If you file for Chapter 7 bankruptcy and some of your property is not exempt, you can still keep it if the trustee "abandons" the property.
Read on to learn what trustee abandonment is, when a trustee might abandon your property, and what happens to property once it’s been abandoned.
In Chapter 7 bankruptcy, the trustee cannot take any property that is exempt. However, if you have nonexempt property, the trustee can sell it and use the proceeds to repay your unsecured creditors. Sometimes the trustee decides that it’s not worth seizing and selling your nonexempt property. In that case, the trustee may “abandon” the property.
(To learn more about exempt and nonexempt property, see the articles in Bankruptcy Exemptions.)
There are several situations when it makes sense for the bankruptcy trustee to abandon property.
Secured property is “upside-down” when the value of the loan secured by the property is more than the market value of the property. Car owners are often upside-down on their car loans. For example, a debtor takes out a five-year loan of $25,000 to buy a brand new Toyota, but due to losing her job the debtor must file for bankruptcy two years later. The debtor still owes $20,000 on the Toyota, but its market value is only $15,000. The debtor is now upside-down on the car loan.
In the example above, it is likely that the trustee will abandon the car. This is because once the secured creditor (loan holder on the car) is paid, there will be no additional funds with which the trustee can pay unsecured creditors. Therefore, it is not worth the trustee’s time or expense to liquidate that car.
If you don’t have a significant amount of nonexempt equity in the property, it might not be worthwhile for the trustee to sell it. From the sale proceeds, the trustee must pay any secured creditor, pay you the amount of your exemption (if any), and deduct the costs of sale and the trustee’s commission. If, after all of these deductions, there is nothing or little left over to pay creditors, the trustee will likely abandon the property.
For example, say you have $5,000 in equity in your car and your state allows you to exempt $4,750 in car equity. Even though there is $250 of nonexempt equity in the car, the trustee is likely to abandon the car. This is because after deducting the costs of selling the car at auction and the trustee’s commission from the $250 of nonexempt equity, there would be little or nothing left to pay creditors.
If the trustee abandons a particular piece of property, it is released from the bankruptcy estate. If the property is not encumbered by a loan, then you get to keep it. For example, if the trustee abandons jewelry or household furniture that you own free and clear, you keep the items. In a typical Chapter 7 bankruptcy, most or all of the debtor’s property is either exempt or abandoned by the trustee. This is why the majority of Chapter 7 bankruptcy filers lose little or any property.
If the property is encumbered by a loan (for example, a car that you have financed), you have several options available to you.
Many of the above options come with restrictions, and all have advantages and disadvantages.
Keep in mind that if you are behind on secured debt payments, the creditor will eventually be able to foreclose or repossess the property.