What Is a "No Asset" Chapter 7 Bankruptcy Case?

Many Chapter 7 filers can keep all or most of their property—but not always. When a filer must give up property in Chapter 7, the case is an "asset" case. By contrast, in a "no asset" Chapter 7 bankruptcy case, the debtor keeps all property, cash, and valuables.

Why Filing an Asset or No Asset Case Matters

Whether you file an asset or a no asset case is important to you and your creditors. In a no asset case, you don't lose any property and your creditors get nothing. By contrast, in an asset case, you must give up property, and your creditors stand to get paid if they follow the correct procedures.

Filers who would lose property in Chapter 7 that they would like to keep often choose to file for Chapter 13 bankruptcy. Chapter 13 filers pay creditors to keep the property they'd lose in Chapter 7. Find out whether Chapter 7 or 13 will be best for you.

How to File an Asset or No Asset Chapter 7 Case

The Chapter 7 filing procedures are the same regardless of whether it's an asset or no asset case. Knowing whether your case is an asset or no asset case when you file is relatively simple. If your paperwork shows that you have property you can't protect with a bankruptcy exemption (explained below), you'll have an asset case. It will be an asset case if exemptions cover everything you own.

Here's the procedure.

• File the bankruptcy petition. You file a packet of papers called the Chapter 7 bankruptcy petition. As with all Chapter 7 cases, you must qualify for Chapter 7 relief. You must pass the means test and take a credit counseling course.
• The automatic stay. When you file your petition, the automatic stay goes into effect. The stay prevents most creditors from continuing most collection activities during your bankruptcy case.
• The creditor's meeting. As in all Chapter 7 bankruptcy cases, you must attend the meeting of creditors, also called the "341 hearing." The trustee will ask questions about your debts and property at the meeting. Creditors usually don't attend. Most meetings last less than 10 minutes.
• The Chapter 7 discharge. At the end of your bankruptcy case, most of your debts will be erased or "discharged," with a few exceptions.

How Creditors Learn About Asset and No Asset Cases

The court alerts creditors that you've filed for bankruptcy by sending a notice that includes the bankruptcy case number, the trustee's name, and whether it's an asset or a no asset case. If it's an asset case, the notice will include the date by which a creditor must complete a proof of claim form to receive a portion of available funds.

Sometimes, your case starts as a no asset case, but the bankruptcy trustee finds assets later. When that occurs, the trustee will send a new notice with a proof of claim filing date.

Why the Trustee Investigates Potential Assets in Chapter 7

In Chapter 7 bankruptcy, the Chapter 7 bankruptcy trustee's job is to get as much money as possible for your unsecured creditors as opposed to secured creditors whose debt is guaranteed by collateral. The trustee does this by taking your property, selling it, and distributing the proceeds to your creditors.

Luckily, bankruptcy law allows debtors to keep some property in Chapter 7, known as "exempt property" property. Each state has bankruptcy exemption laws listing property you can exempt in its entirety or up to a certain dollar amount. Some states allow you to use a set of exemptions set by federal bankruptcy law instead of the state exemptions.

If an exemption covers your equity in a piece of property, it's safe from the bankruptcy trustee. For example, if you own a piano worth $2,000 and your state exempts up to $3,000 in musical instruments, you get to keep your piano.

If, however, you have equity in your property that is not exempt, the trustee will sell it. For example, let's say your house is worth $500,000 and the balance on your mortgage is $250,000. If your state exempts up to $50,000 in a home, you will probably lose your home in Chapter 7. The bankruptcy trustee would sell the house, pay your lender $250,000, give you $50,000 (your exemption), deduct the costs of sale and trustee's commission, and then use the rest to pay your unsecured creditors.

If you determine that you would not lose any property under the available bankruptcy exemptions, yours would be a no asset Chapter 7 bankruptcy case.

When the Trustee Will Abandon Property

If just a small amount of your property is nonexempt, the trustee will probably "abandon" the property. For example, suppose you own a car worth $10,000, the balance on your car loan is $9,000, and your state allows you to exempt up to $500 using a motor vehicle exemption. If the trustee were to sell the car for $10,000, pay your lender $9,000, and pay you $500 (the exemption amount), that would leave only $500 to cover the costs of the car sale and the trustee's commission.

The trustee, realizing that little or nothing would be left to distribute to unsecured creditors, would probably choose not to sell the car. In this situation, you'd likely get to keep the vehicle.