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In a Chapter 7 bankruptcy, one of the trustee's primary responsibilities is to determine whether you have anything that is not protected by the exemption laws. The reason your assetis not protected by an exemption may be based on the nature of the asset itself, or the value of the asset when compared to the maximum exemption you can use.
For example, you may be able to exempt your interest in your car, but only up to a certain dollar amount. If the value of your car exceeds this amount, and you own it free and clear, your car has non-exempt equity that the trusteeneeds to collect for the benefit of your creditors.
Since you have to complete your Schedule C to claim all applicable exemptions to your assets, you will have a good idea going into the case what, if anything, the trustee may be able to reach. Remember, the basic premise underlying a Chapter 7 is that in exchange for receiving a discharge, your creditors will receive the value of your non-exempt (un-protected) assets.
What does it mean?
If your bankruptcy petition states that you do not expect that assets will be available to distribute to creditors, the initial notice of your filing generally instructs creditors that they do not have to file a claim in your case because it is a "no-asset case." Once the trustee has determined there are assets, they will file a request with the court asking the court to set a deadline for creditors to file claims. This turns your case into an “asset case” that is expected to result in the distribution of at least some funds to your creditors.
Once the court receives the trustee’s request, it will send a notice to creditors that assets have been discovered and inform them of the deadline for filing a proof of claim in your case. Creditors have 90 days from the date of the notice to file the proof of claim. Governmental creditors, such as the IRS, have until either 180 days from the date your petition was filed or the date shown on the court’s notice, whichever is later, to file a claim.
Creditors do not have to file a claim in your case. However, if they don’t, they will not be receiving any funds from the trustee.↑ Back to top
What should I do with the claims?
Once the deadline passes, you will have 30 days to file a claim on behalf of a creditor that failed to do so. If you have student loans, or other non-dischargeable debts, you should pay attention to the claims as they come in, so you can file a claim on behalf of these creditors if needed. That way, at least a portion of the amount paid to the trustee will be used to pay those debts that will survive your bankruptcy.↑ Back to top
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What to expect from the Trustee
The logistics of how trustees collect non-exempt assets vary widely. Generally speaking, the trustee may ask you about a certain asset, and whether you are interested in making an offer to buy it back from the estate, at your creditors meeting. Since most trustees don't get the chance to really dig into your case until then, it is rare that they will raise this issue with you before the creditors’ meeting. If they don't raise it at the creditors meeting, they will typically follow up with a letter. Keep in mind, the trustee has a lot of time to work on your case and the fact that your trustee hasn’t mentioned the asset to you does not mean they are not interested in it.
What can the debtor (you) do
When you have “liquid assets”, such as cash on hand, bank account balances, or a tax refund coming your way, that are not protected by an available exemption, the trustee will expect a check or money order from you. It does not matter if the money was supposed to be used for something else, if it is not exempt, you have to disclose it and potentially turn it over. If you have non-dischargeable priority debts, it is important to make this process easy on the trustee so they do not feel as though they need to hire an attorney to help in getting you to comply. More on trustee’s attorneys and how their involvement may impact your non-dischargeable debts below.
The trustee may offer you the option to buy the asset back from the estate. Essentially, it's ok to keep your asset as long as you reimburse your creditors for it. Sometimes, this will mean making an offer to the trustee, who then sets a public auction and sends a notice to all interested parties. At the auction, other bidders may make offers higher than yours and you can increase your offer.
If your asset is partially exempt, you will only have to pay for the non-exempt or unprotected portion of it, while any other bidders have to pay for its full value. Thus, if someone outbids you on an asset that is partially exempt, you will receive a dollar amount equal to your claimed exemption from the trustee after the auction closes. If you do participate in the auction, make sure you know how quickly the successful bidder (including you) is expected to pay the money to the trustee.
Other times, the trustee may not require a formal auction process and, instead, allow you to pay the money in exchange for keeping the asset. If you think about doing this, keep in mind that the Chapter 7 trustee may not be able to accommodate a lengthy payment plan.
Surrendering the asset
If you are not interested in keeping the asset anyway, then you can simply make arrangements with the trustee for turning it over.
What is important to remember here is that the trustee is not your enemy. They are just doing a job that needs to be done, and the easier you make the process for the trustee, the smoother your case will progress, meaning less stress and worry for you.
Converting to a Chapter 13 Case
Depending on your circumstances, you may be able to convert your Chapter 7 bankruptcy to a case under Chapter 13. In Chapter 13 bankruptcy, you are able to keep your non-exempt asset because your Chapter 13 payment plan reimburses your creditors for it over time. In other words, Chapter 13 is a way to buy back your asset from the bankruptcy estate with monthly payments for the next 36 - 60 months, instead of having to come up with the money all at once. However, it also comes with all the obligations a Chapter 13 imposes on debtors that you can avoid by staying in a Chapter 7. Depending on how much work your trustee and their attorneys have done in your Chapter 7 case already, they may be granted a claim for fees and costs they incurred before your case was converted.↑ Back to top
Trustee's attorneys and what to look out for
It is not unusual in “asset cases” for the trustee to hire their own attorney to help with the case. Before the attorney can start working on the case, they will have to file an application with the court and obtain an order authorizing their employment. The attorney will be working on behalf of your bankruptcy estate, and the attorneys' fees and costs will be paid by the funds the trustee collects from the liquidation of your non-exempt assets. So, while you will indirectly be paying for the trustee's attorney, you are not expected to pay their fees personally.
Since the trustee's and their attorneys' fees and expenses are taken off the top before the remaining funds are distributed to your creditors, it is important to pay attention and do what you can to keep the trustee's attorneys' fees as low as possible if you have non-dischargeable priority debt or student loan debt. This will help you maximize the amount of money paid to your creditors.
For example, if you have a $5,000 asset and owe the IRS $4,000, making the trustee's job easier by turning the asset over and keeping the attorney's involvement to a minimum will directly benefit you because whatever is left after payment of their fees will go to the IRS. This, in turn, will lower the balance of a debt that otherwise survives your bankruptcy. If, on the other hand, the trustee’s attorneys have to spend a lot of time getting the asset from you, their fees may eat up its value almost entirely, meaning the IRS will not receive as much from the trustee and you are left with a higher balance on this non-dischargeable debt.↑ Back to top
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A vast majority of cases are no-asset cases. However, every case is unique and whether your trustee will ask you to turn money or property over to him depends on whether the exemptions you are able to claim protect all of your property. If the trustee has determined that you have assets that are not protected, just keep in mind that in exchange for turning over these non-exempt assets, you will be relieved from having to pay your creditors directly.↑ Back to top