Chapter 7: Asset Case Versus No-Asset Case

Chapter 7 bankruptcy is called the liquidation chapter because if the debtor has any assets that cannot be exempted, the Chapter 7 trustee has the ability to sell the assets and distribute the proceeds of the sale to creditors. If the debtor has no assets available, the case is considered a no-asset case, and if the debtor has assets, it’s considered an asset case. As part of every bankruptcy, the filer must list all of their assets, and failure to do so could result in criminal fines and jail time. Therefore, It is important to understand the difference between a Chapter 7 bankruptcy asset case versus no-asset case to protect your property in Chapter 7. Should you be worried that your car or home may be sold by the Chapter 7 trustee?

The Chapter 7 No-Asset Case

Most Chapter 7 bankruptcies are no-asset cases. According to the American Bankruptcy Institute, approximately only 8% of all chapter 7 cases in the United States are asset cases. A no-asset case means that all of the filer’s assets are either exempted or do not have any equity. Most people’s largest assets are their home and car. If you owe more than the value of the asset, for purposes of a bankruptcy, that asset is worth nothing. For example, if your home is worth $300,000.00 and you owe your mortgage company $300,000.00, the home is not worth anything for bankruptcy purposes because it has no equity. Similarly, if you owe $15,000.00 on a car that is worth $10,000.00, the car is not worth anything to the bankruptcy trustee.

Even if you have some equity in your home or car, in Maryland, there are state exemptions that can be used to protect your equity interest in those assets. For owner-occupied residential real property, you can exempt $25,150.00. Additionally, Maryland has a $5,000.00 personal property exemption (such as a car or bank account) and a $6,000.000 “wildcard” exemption that can be used on anything.

Just because your exemptions do not cover all the value of property does not mean that the trustee will wish to sell those assets, as the time and cost involved in selling assets can be significant and the asset may be difficult to sell. For example, if you and 3 other people all have a 25% interest in property that is worth $50,000.00, the trustee may not wish to sell that property given that you interest in the property is only worth $12,500.00. Also, if the property contains hazardous materials, such as a gas station, it is more difficult to sell. Another common example of property that trustees typically will not sell is average household furniture. Although it may sell for some amount of money, often it is not high enough to justify the cost and time to sell it.

If all of your assets do not have equity and can be fully exempted, after your 341 meeting of creditors, the chapter 7 trustee will issue a “Report of No Distribution” which lets the court know that there are no assets to distribute to creditors. After that report, your case will proceed regularly and assuming you have met the requirements for discharge, the Court will typically grant your discharge within a few months after your 341 meeting of creditors.

The Chapter 7 Asset Case

If you have assets that cannot be exempted and/or have equity, then the Chapter 7 case may be an asset case. For example, if you own real property that has equity, the Chapter 7 trustee may wish to sell that real property and distribute the proceeds to creditors. Also, if you have a car that has equity, the Chapter 7 trustee may wish to sell asset. However, just because you have an asset case does not mean that the Chapter 7 trustee will sell your property. It is possible to negotiate with the trustee to pay the value of the asset over time or to pay a lower amount than the value of the asset to the trustee which will save the trustee the time and expense of having to liquidate that asset.

If your case is an asset case, the trustee will issue a Notice of Assets in the case and will then set a Proof of Claim bar date which is mailed to all of the creditors. In order to receive a distribution under the asset Chapter 7, the creditors must file a Proof of Claim in the case before the bar date, which is very similar to how a Chapter 13 bankruptcy works. If the creditors do not file claims on time, they will not receive a distribution under the asset Chapter 7.

The bankruptcy trustee is incentivized to sell assets in an asset Chapter 7 because they receive a commission from the sale of assets. The fee is generally 25% of the first $5,000 distributed, 10% of amounts distributed above $5,000.000 and less than $50,000.00, 5% of amounts distributed above $50,000.00 but less than $1 million, and 3% for amounts over $1 million. 11 U.S.C. § 326(a).

If you are thinking of filing for bankruptcy and wish to ensure that your assets are protected, please contact Steiner Law Group at (410) 670-7060.