In a Chapter 7 bankruptcy, the bankruptcy trustee can liquidate your nonexempt assets and distribute the proceeds to your creditors. However, you may still be able to keep your nonexempt property if:
When you file for Chapter 7 bankruptcy, your property becomes property of your bankruptcy estate. The appointed Chapter 7 trustee has a duty to determine how much property you own and if any of your assets should be sold to pay your creditors. (For more on how Chapter 7 works, see Chapter 7 Bankruptcy.)
Depending on your state’s exemption laws, you are allowed to keep a certain amount of your assets. This is called exempt property. If you can’t exempt a certain piece of property, it is considered nonexempt. The trustee can take nonexempt property, liquidate it, and distribute the proceeds to your creditors. (To learn more how this works, see our comprehensive Bankruptcy Exemptions area.)
Even if you can’t exempt a certain asset, you may still be able to keep it. Below, we discuss the different ways you may be able to hold on to nonexempt property.
The trustee usually hires a third party to sell your nonexempt property. This means that there is a cost to selling an asset in bankruptcy. In addition to sale costs, the trustee also receives a commission from all assets he or she sells. Sometimes the nonexempt portion of an asset’s value is so low that it would only be enough to satisfy sale costs and trustee commissions. Since that asset would be of little or no value to your creditors, the trustee would likely abandon it. If the trustee abandons nonexempt property, you are allowed to keep it. (To learn more, see When Will the Trustee Abandon Property in Chapter 7?)
Example. Let’s say your house is worth $153,000 and you own it free and clear. Your state has a homestead exemption allowing you to exempt $150,000 of your home’s value. That means you have $3,000 in nonexempt home equity. Technically, the trustee can sell your house to claim the $3,000 of nonexempt equity. However, the cost of selling your house and the resulting commission for the trustee will probably exceed $3,000, leaving nothing to your creditors. In this case, the trustee is likely to abandon your house and let you keep it despite the nonexempt portion.
If the trustee does not abandon your nonexempt property, you can pay him or her an amount equal to the nonexempt portion of the asset. By paying the trustee you are essentially buying back your nonexempt property. In fact, you may even be able to negotiate with the trustee and pay less than full value because the trustee will be spared the hassle and cost of selling the asset to a third party. This may be an attractive option if you would like to keep the nonexempt property because it is unique or has sentimental value (such as a family heirloom).
If you can’t afford to pay the trustee, you may be able to exchange an exempt asset in order to keep nonexempt property. However, whether the trustee will agree to an exchange depends on each asset’s value and ease of sale. If you propose to exchange an exempt asset that is hard to sell, the trustee may not agree to the exchange.
To find out more about what happens to particular property in Chapter 7, see Your Property in Chapter 7 Bankruptcy.