What Is a Chapter 7 No-Asset Bankruptcy Case?

Most people who file for Chapter 7 bankruptcy don't turn over any property or cash to the bankruptcy trustee appointed to administer the matter. Instead, they keep everything they own in what is known as a "no-asset case." The shorthand term "no-asset" tells creditors not to expect to get paid out of any bankruptcy proceeds because there won't be any. Read on to learn more about Chapter 7 no-asset bankruptcies.

How Does Chapter 7 Bankruptcy Work?

Not everyone can file for Chapter 7 bankruptcy and discharge qualified debt. First, you'll need to pass the means test or show that you fit into one of the means test exemption categories.

Next, you'll want to determine whether you can keep all of your property. When you file for Chapter 7 bankruptcy, all of your assets become the property of the bankruptcy estate. Your right to keep your assets will depend on whether they're exempt.

• Exempt property. Each state has a set of bankruptcy exemptions you can use to protect a certain amount of assets in Chapter 7 bankruptcy. The idea behind exemptions is that you need some property to sustain yourself and make a fresh start. If you can exempt an asset, you can keep it. Your state decides whether you must use the state exemptions or if you can use the federal exemptions instead.
• Nonexempt property. The Chapter 7 bankruptcy trustee will sell any nonexempt assets and distribute the proceeds to your creditors.

Exemption amounts vary significantly by state. As a result, you'll want to review your state's exemptions or consult a knowledgeable bankruptcy attorney before filing your case.

(Learn whether bankruptcy will make sense for you by reading Which Debts Are Discharged in Chapter 7 Bankruptcy?)

What Is a Chapter 7 No-Asset Bankruptcy Case?

Your case will be a no-asset bankruptcy case if you can protect all of your property with bankruptcy exemptions so that the Chapter 7 trustee can't sell anything you own. Most Chapter 7 bankruptcies are no-asset cases.

The court will send out a notice to your creditors letting them know that they won't receive anything through the bankruptcy and don't need to file a proof of claim documenting how much they're owed. If the trustee finds assets while investigating the bankruptcy case, the trustee will alert the creditors to the change so that they can file the paperwork needed to claim a portion of the funds.