If you own property that's not protected, or not fully protected, by exemptions, you may owe money to your bankruptcy estate. You can either pay the money into the estate and keep the property or asset, or you can surrender the property, keep the exempted amount, and not have to pay into the estate.
Chapter 7 of the U.S. Bankruptcy Code is titled, “Liquidation.” The idea, in theory, is that you liquidate, or sell, all of your property and use the money to pay your debts. Any remaining debt is then wiped away, or discharged. In reality, though, most Chapter 7 cases don’t involve any liquidation at all. That’s because exemption laws protect some or all of your property from being sold by the trustee.
But sometimes the available exemptions aren’t enough to fully protect everything you own (your assets). An asset that isn’t fully protected is called a non-exempt asset. This article covers what happens if your Chapter 7 bankruptcy includes non-exempt assets.
What Are Non-Exempt Assets?
You must list all your assets in your bankruptcy paperwork. Assets include all your property and belongings, as well as intangible things like money in a bank account or a retirement plan. Together, all your assets make up your bankruptcy estate.
For many Chapter 7 filers, most or all of these assets are protected by exemptions. You’ll claim these exemptions on Schedule C in your bankruptcy forms. If all your assets are covered by exemptions, you have a “no-asset case,” and you won’t owe money to your bankruptcy estate.
But if you have non-exempt assets, you may owe money or need to give an asset to your trustee. This can happen for two reasons:
You have an asset that’s not covered by an exemption. For example, if you own a second home that isn’t your primary residence, it won’t be covered by an exemption. There’s only an exemption for your primary residence in most states.
You own an asset that’s not fully protected by an available exemption. For example, say you live in New York and you own a car free and clear that’s worth $7,500. The New York motor vehicle exemption only protects up to $4,550, so you have $2,950 in non-exempt equity in the car.
In either case, the bankruptcy trustee administering your case can collect the asset and sell it for the benefit of your creditors. In the case of the car, they’d have to give you the $4,550 that’s exempt. They may also allow you to pay the non-exempt portion to keep the vehicle. More on this later.
Since you have to complete a Schedule C to claim all applicable exemptions, you’ll have a good idea of what, if anything, the trustee may be able to reach when you file your case.
Creditors Must File a Proof of Claim
If the trustee determines that you have non-exempt assets, they’ll ask the court to set a deadline for creditors to file a proof of claim. This means you have an “asset case” that will likely result in the distribution of some funds to your creditors. Creditors have to file a proof of claim to receive funds.
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. Most creditors have 90 days from the date of the notice to file the proof of claim. Governmental creditors, like the IRS, have 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 don’t have to file a claim in your case. But if they don’t, they won’t receive any funds from the trustee.
You Can File a Claim on Behalf of a Creditor
Once the deadline passes, you’ll have 30 days to file a claim on behalf of a creditor that failed to do so. If you have 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 the debts that will survive your bankruptcy.
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What To Expect From the Trustee
Different trustees deal with non-exempt assets in different ways. Generally speaking, the trustee may ask you about a certain asset and go over your options at the meeting of creditors. Since most trustees don't get the chance to really dig into your case until then, they’ll rarely raise this issue with you before the creditors’ meeting. If they don't raise it at the creditors' meeting, they’ll typically follow up with a letter.
Collecting Non-Exempt Liquid Assets
Liquid assets include things like cash on hand, bank account balances, or a tax refund coming your way. If you have liquid assets that aren’t protected by an exemption, the trustee will expect a check or money order from you. It doesn’t matter if the money was supposed to be used for something else, if it’s not exempt, you have to disclose it and potentially turn it over.
If you have non-dischargeable priority debts, it’s important to make this process easy on the trustee so they don’t have to hire an attorney to get you to comply. We’ll discuss trustees’ attorneys and how their involvement may impact your non-dischargeable debts below.
Dealing With Other Assets
The trustee may give you an 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.
In some cases, the trustee may allow you to pay the money in exchange for keeping the asset without doing an auction. For example, if you have $2,000 of non-exempt equity in your car, you can offer to “buy” the car back from the bankruptcy estate by paying the $2,000 into the estate. That way, the creditors still get the amount they’re entitled to, but you can skip the headache of having to give up your car. If you want to do this, keep in mind that the Chapter 7 trustee may not be able to accommodate a lengthy payment plan.
Other times, this means the trustee will set a public auction and send a notice to all interested parties. You can bid at the auction, and if other bidders make offers higher than yours, you can increase your offer. If your asset is partially exempt (such as in the New York car example above), you’ll only have to pay for the non-exempt or unprotected portion of it. This gives you an advantage over other bidders who have to pay its full value.
But if someone outbids you on an asset that’s partially exempt, you’ll 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 trustee.
Surrendering the Asset
If you aren’t interested in keeping the asset, you can simply make arrangements with the trustee to turn it over. Remember that the trustee isn’t your enemy. They’re just doing a job that needs to be done. The easier you make the process for the trustee, the smoother your case will progress. This means 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 Chapter 13. In Chapter 13 bankruptcy, you can keep your non-exempt assets so long as you make the payments in your repayment plan. 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.
But Chapter 13 cases are more complicated and more expensive than Chapter 7 cases. Plus, 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.
Trustee's Attorneys and What To Look Out For
Many trustees administering “asset cases” hire their own attorney to help with the case. Before the attorney can start working on the case, they have to file an application with the court and get an order authorizing their employment. The attorney works on behalf of your bankruptcy estate, and the attorney fees and costs are paid by the funds the trustee collects from the liquidation of your non-exempt assets. So while you indirectly pay for the trustee's attorney, you aren’t expected to pay their fees personally.
The trustee's and their attorney’s fees and expenses are taken off the top from liquidated items before the remaining funds are distributed to your creditors. This is why it’s important to 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. It helps you maximize the amount of money paid to your creditors.
For example, let’s say you have a $5,000 non-exempt asset and you owe the IRS $4,000. If you make the trustee's job easy by turning the asset over and keeping the attorney's involvement to a minimum, you’ll directly benefit because whatever’s left after their fees are paid goes to the IRS (assuming there aren’t other creditor claims). This lowers the balance of a debt that will survive your bankruptcy.
On the other hand, if 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. And that means the IRS won’t receive as much from the trustee, so you’re left with a higher balance on this non-dischargeable debt.
Most Chapter 7 cases are no-asset cases. But every case is unique. If you can’t claim all your property as exempt, your trustee will ask you to turn non-exempt money or property over. If the trustee determines that you have assets that aren’t protected by exemptions, keep in mind that in exchange for turning over these non-exempt assets, you’ll be relieved from having to pay your creditors directly.