When you file for Chapter 7 bankruptcy, the trustee sells your nonexempt property and uses the proceeds to repay your creditors. What happens if you file for bankruptcy thinking you’ll be able to keep a certain item of property, and then learn that the trustee will sell it? Can you dismiss your bankruptcy case in order to save your property?
Unfortunately, you don’t have the right to dismiss your Chapter 7 case without court approval. Read on to learn when your property might be sold by the trustee, when you might be allowed to dismiss your bankruptcy case, and other options to keep your property in bankruptcy.
All, or nearly all, of your property, becomes part of the bankruptcy estate when you file a Chapter 7 bankruptcy. This means that the bankruptcy trustee has control over this property. In a Chapter 7 bankruptcy, the trustee will often sell your nonexempt property and use the proceeds to repay your unsecured creditors, at least in part.
Although the bankruptcy trustee can sell nonexempt property to repay debts, he or she is not allowed to sell property that is exempt. Here’s why.
When you file for bankruptcy, you don’t necessarily lose all of your property. Each state and the federal bankruptcy code has designated certain types of property that you can keep in bankruptcy – called exempt property. Some property is exempt no matter how much the property is worth. Other property might be exempt up to a certain dollar amount. Some examples of property that might be exempt under your state’s laws or the bankruptcy code include your car (up to a certain dollar amount), household furniture, or wedding or engagement rings.
For example, if your state exempts weddings rings up to $3,000 in value, and your ring is worth $2,000, the ring would be exempt in bankruptcy and you’d get to keep it.
(To learn more about how exemptions work, see Bankruptcy Exemptions: An Overview.)
In most cases with careful planning, detailed knowledge of how bankruptcy works, and competent legal representation (if you’ve decided to hire a lawyer), you should know before you file for bankruptcy what property you’ll be able to keep and what property the trustee will sell.
But sometimes you are in for a surprise after you’ve filed, and the trustee plans to take property that you really want to keep. This may be because you didn’t understand how exemptions worked before you filed, you didn’t research your state’s exemptions carefully, you thought your property’s value was lower than it really was, or you changed your mind about an item of property that you previously didn’t want to keep.
If this happens to you, and you want to keep property that the trustee plans to sell, what can you do?
Unfortunately, if you decide you want to keep property after you’ve filed for bankruptcy, dismissing your bankruptcy in order to save the property is not necessarily an option. Here’s why.
Once you file a Chapter 7 bankruptcy, you do not have an automatic right to dismiss the case. In order to dismiss the case, the bankruptcy court will have to hold a hearing to see if there is a good reason (what the Bankruptcy Code calls “cause”) to allow the case to be dismissed. Dismissing a case because you do not want a trustee to sell certain property is not considered a good reason to dismiss.
The court will look at your property to see if there are non-exempt assets and will want to know the reason why you want to dismiss the case. The court will review the case to see if any of your creditors would be harmed (or “prejudiced”) by letting the case be dismissed. If there is non-exempt property that can be sold to pay your debts, then creditors would be prejudiced by a dismissal. In order for the case to be dismissed at that point, you would have to show the court that that you have some other way to pay your creditors.
If you want to keep nonexempt property in your bankruptcy, you may have a few other options.
Pay the trustee the value of the property. Sometimes, you can offer to buy the nonexempt property from the trustee. Because this might help the trustee minimize expenses and costs, you may be able to negotiate the value of the property and the amount you will have to pay.
Hope the trustee abandons the property. If the dollar amount of the nonexempt portion of the property is small, it might not be worth it for the trustee to sell the property. For example assume you own a guitar worth $200, but there is no state or federal exemption that covers it. The trustee has the right to sell the guitar and use the proceeds to pay your unsecured creditors. However, if it costs the trustee $200 to list the guitar for sale, find a buyer, and subtract the trustee’s commission, there would be nothing left for unsecured creditors. In this situation, the trustee would not waste her time selling the guitar and would “abandon” it. If the trustee does this, you would be able to keep the guitar.
Convert to Chapter 13. Even if the court denies your request to dismiss the case, you might be able to convert a Chapter 7 case to a Chapter 13 bankruptcy. In Chapter 13 bankruptcy, you keep your property and repay creditors (in full or in part, depending on a number of factors) through a repayment plan that lasts between three and five years. (Learn how Chapter 13 bankruptcy works.)