In Chapter 7 bankruptcy, the bankruptcy trustee can take and sell your nonexempt property in order to repay your unsecured creditors. However, sometimes the bankruptcy trustee will "abandon" nonexempt property, meaning the trustee decides not to take the property. In that case, you get to keep the property, or if the property is secured, the creditor may be able to proceed with foreclosure or repossession.
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.
Nonexempt Property in Chapter 7 Bankruptcy
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.
When the Trustee Might "Abandon" Property
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.
What Happens If the Trustee Abandons the Property?
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.
How a Trustee Abandons Property
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.