What is non-exempt equity?

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Written by Upsolve.  
Updated November 18, 2019

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What property you are allowed to keep and what you may be forced to sell or surrender when you file a Chapter 7 bankruptcy depends on how much non-exempt equity you have in the item. Let’s explore what this means for you, so you can choose the path to debt relief that makes the most sense for you. 

What Is Equity?

Every Chapter 7 bankruptcy begins with a list of the property you own and how much, if anything, you owe on it. If you own property that is worth more than you owe on it, you have “equity” in that property. For example, if you own a car worth $3,500 and owe $1,000 on it, your equity in the car is $2,500. For property that you own free and clear, the equity is equal to its value.

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What Is Secured Debt And How Does It Impact Equity Generally?

Whether you have equity in property, or not, if you still owe a creditor money for the property, the debt is considered a secured debt and the creditor is known as a “secured creditor”. Under the U.S. Bankruptcy Code, a secured creditor has a right to have the property securing their debt returned to them before the debt can be eliminated through bankruptcy. That’s why the value of the property is not the same as your equity in the property if you are still making payments on a loan. 

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What Has To Happen For There To Be Non-Exempt Equity?

Every state deals with the property you own and how much of it you can keep when you file bankruptcy differently. The type and value of property you can keep after filing bankruptcy is determined by exemptions. There are federal bankruptcy exemptions that are the same throughout the country, but not every state allows you to use the federal bankruptcy exemptions. That’s because every state has their own set of exemptions to protect a filer’s property. 

If your state provides a $2,000 exemption for a vehicle owned by you, you can keep vehicles up to a total value of $2,000. If the value of your property exceeds the amount of the available exemption, you have non-exempt equity. Only a portion of the total value of the property is protected from creditors. 

Whether the equity you have in property is exempt or non-exempt is not necessarily based solely on the value of the property. Meaning if you own a car worth $40,000 for example and have a $38,000 loan on the car, you would only have $2,000 of equity which would usually be exempt in most states. On the other hand, if your car is paid for and worth $6,000, and your state only allowed a $2,000 exemption for vehicles, you would have $4,000 of non-exempt equity in that car. 

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What Can A Bankruptcy Trustee Do If There Is A Lot of Non-Exempt Equity?

Typically if you own property that has a small amount of non-exempt equity, the bankruptcy trustee will not exercise their right to sell that property as little or none of the non-exempt equity would be left after paying the costs of the sale. However, if you have a piece of property with a lot of non-exempt equity, the bankruptcy trustee assigned to your case has the duty to sell that property to realize the non-exempt equity for your unsecured creditors. Any proceeds from the sale will go first to pay any secured creditors with an interest in the property, followed by your exemption and then finally to the trustee and your creditors. If you are considering filing a Chapter 7 bankruptcy on your own and believe you have assets with significant non-exempt equity you may be better off speaking with an attorney about filing a Chapter 13 instead.

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What Options Does A Filer Have To Protect Non-Exempt Equity, If Any?

Before selling property that has a significant amount of non-exempt equity, most trustees will notify you or your attorney of their intention to do so. This notice gives you the opportunity to choose between allowing the property to be sold and having your exemption paid to you from the proceeds of the sale. Or, if you would prefer to keep the property, you can offer to pay the non-exempt equity directly to the trustee, to skip the sale but pay your creditors what they are due under the law. When you do, most trustees will usually accept a good faith offer for less than the total amount of non-exempt equity claimed in the property since they do not have to incur the costs of selling it. Another option is to convert your Chapter 7 case to a Chapter 13 bankruptcy.  In a Chapter 13 bankruptcy, the trustee does not sell non-exempt assets. Instead, the filer essentially reimburses their creditors for the value of their non-exempt property through the repayment plan. Finally, if you don’t think there is non-exempt equity but the trustee does, you can file a motion to abandon the property. In this motion, you show the court proof of your position that the property does not have any non-exempt equity. If the court agrees, the property will be abandoned (or removed) from your bankruptcy estate and is no longer at risk of being sold by your trustee. 

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Conclusion

When deciding whether to file Chapter 7 or Chapter 13 bankruptcy, it is important that you take a moment to determine whether you have any non-exempt equity in any of the property you own. If you do, you will have to decide whether your preference is to have a Chapter 7 trustee sell the item for the benefit of your creditors or to pay for the item as part of a Chapter 13 plan. If you have questions about whether filing for bankruptcy is right for you, please visit our Learning Center to find out more. If you don’t have anything that is not exempt but you can’t afford to hire a lawyer to help you file a simple Chapter 7 bankruptcy, see if Upsolve is right for you. Upsolve is an award-winning nonprofit that helps people file for relief under Chapter 7 of the Bankruptcy Code for free.

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