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.
Find out whether Chapter 7 or 13 will be best for you.
Whether you file an asset or a no-asset case is important to you, but it’s also important to your creditors. In a no-asset case, you don’t lose any property and your creditors get nothing. By contrast, in an asset case, not only do you have to give up property, but your creditors stand to get paid if they follow the correct procedures.
Here’s how it works.
The court alerts creditors that you’ve filed for bankruptcy by sending out a notice. The notice includes the bankruptcy case number, the name of the trustee, and states 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. If a case is initially filed as a no-asset case, but the bankruptcy trustee finds assets later, the trustee will send out a new notice with a proof of claim filing date.
The filing procedures are the same for all Chapter 7 bankruptcy cases. Whether your case is an asset or no-asset case will depend on whether your paperwork shows that you have property that you can’t protect with a bankruptcy exemption (more below). Here’s the procedure.
Find out more details about the Chapter 7 process.
In Chapter 7 bankruptcy, the bankruptcy trustee's job is to get as much money as possible for your unsecured creditors (as opposed to secured creditors whose debt is secured 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. Property that you can keep is called "exempt" property. Each state has a list of exempt property, either 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 your equity in a piece of property is covered by an exemption, 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 under the available bankruptcy exemptions you would not lose any property, yours would be a no-asset Chapter 7 bankruptcy case.
If just a small amount of your property is nonexempt, the trustee will probably "abandon" the property. For example, say 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 in a motor vehicle. If the trustee were to sell the car for $10,000, pay your lender $9,000, and pay you $500 (your exemption), that would leave only $500 to cover the costs of the car sale and 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 get to keep the car.