How can I tell if I have nonexempt property? Nonexempt property won’t appear in the exemption list. What will happen to your nonexempt property will depend on the type of bankruptcy chapter that you file.
What happens to nonexempt property in a Chapter 7 bankruptcy? When you file this bankruptcy chapter, the bankruptcy trustee—the court-appointed official responsible for managing your case—will sell your nonexempt property for the benefit of your creditors. The trustee will use the sales proceeds to pay your bills in the order required by bankruptcy law. Priority debt, such as domestic support obligations (child or spousal support) or tax debt, will get paid first. If you don’t have priority debt, or if funds remain after paying it in full, the trustee will pay your nonpriority unsecured debts, such as credit card balances, personal loans, and utility bills.
What happens to nonexempt property in a Chapter 13 bankruptcy? The trustee won’t sell your nonexempt property. Instead, you’ll pay an amount equal to the value of the nonexempt property to your unsecured creditors (creditors whose debt isn’t guaranteed by collateral). For instance, suppose that you aren’t able to exempt a boat worth $15,000 or a timeshare valued at $7,500. You’ll need to pay your unsecured creditors at least $22,500 over the course of your three- to five-year plan.
(For more information about nonexempt property, visit Nolo’s Bankruptcy Exemptions topic page.)
]]>Read on to learn when the bankruptcy trustee might abandon your property, how the trustee abandons property, and what that means for you or your creditors.
After the initial bankruptcy filing, all of the debtor's nonexempt property becomes part of the bankruptcy estate. However, not all property becomes part of the bankruptcy estate. The property that is excluded is called exempt property and the debtor is allowed to keep this property. Examples of exempt property include your homestead (often up to a certain dollar amount), ordinary household goods, pensions and retirement accounts, your vehicle (up to a certain value), clothes, and public benefits such as social security and unemployment. What kinds of properties are exempt and up to what value they are exempt varies from state to state.
(To learn more about bankruptcy exemptions and what property is protected, check out Nolo's section on Bankruptcy Exemptions and Your Property.)
The bankruptcy trustee oversees and administers the estate, and determines which nonexempt property can be liquidated in order to pay back creditors.
If the bankruptcy trustee determines that liquidating particular property in the estate won’t yield much for creditors, the trustee may choose to abandon the property. The trustee may also do this if the property would be hard to sell.
This might happen if, after deducting the costs of sale, the trustee's commission, any amount due a creditor with a lien against the property, and any exemption owed to you, there is nothing or little left to distribute to creditors.
Example. Sara owns a car that has a replacement value of $6,000. She owes $1,500 to her car loan lender and her state allows her to exempt $3,000 in car equity. If the trustee were to sell the car at auction, the trustee would incur costs of about $2,000 in order to pick up, store, and auction off the car, and would collect a $500 commission on the sale. After deducting $1,500 (which goes to the lender), $3,000 (the trustee pays this to Sara), $2,000 (costs of sale), and $500 (the trustee's commission) from the $6,000 sale price, nothing would be left for Sara’s creditors. The trustee would likely abandon the car.
If the trustee abandons the property you keep the property even though it is nonexempt. The trustee may also abandon the property to the lien holder if the lien is greater than the value of the property. For example, if you have stopped making payments on your home and you have a mortgage for $100,000 but the fair market value of the property is $75,000, then the trustee will most likely abandon the property and the lender can proceed with the foreclosure if you are behind on your payments.
In most cases, the trustee will file a Notice of Abandonment to notify the creditors of the intent not to liquidate the property of the bankruptcy estate to meet their debt obligations. By filing this notice, the trustee is formally giving control of the property back to the debtor and any other creditor that may have an interest in the property. Filing this notice is also helpful because it lets all the creditors know where they stand and what to expect from the bankruptcy.
Sometimes the trustee will abandon property without going through the process of filing a Notice of Abandonment. If this happens, section 554(c) of the Bankruptcy Code provides that if the trustee does not affirmatively abandon property, and it is not otherwise affirmatively administered, the property will be deemed abandoned.
Learn more about Your Property & Debts in Chapter 7 Bankruptcy.
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