Assets in a Chapter 7

Chapter 7 bankruptcy is considered a “Fresh Start” bankruptcy. The intent of this Chapter is for you to discharge your unsecured debt, under the argument that (a) your budget is upside down and that you cannot afford to pay back any creditors; and (b) that you are not better off than any of your creditors when you exit the bankruptcy. To determine part (b), the Bankruptcy Court allows you to protect from liquidation or “exempt” a certain amount of your assets. Any assets you have on the date of bankruptcy filing that are not exempt will be liquidated by the Chapter 7 Trustee to repay your unsecured creditors. For example, the Court allows a homestead exemption which protects a certain amount of equity in your principal residence. This means that you can claim the residence that you live in as exempt from being sold off to pay back your creditors so long as the amount of equity in your residence is equivalent to the maximum the Court allows you to protect. If you have $300,000 in equity in your residence and the Court allows your family to exempt $100,000; that means the Trustee will be very interested in liquidating the other $200,000 to repay back your creditors. In some cases, the Trustee will negotiate with you – allowing you to pay the amount of money that would be received from the sale of your residence, instead of actually selling your home. In order to do that, you having to come up with the funds to settle with the Trustee within a short few months of filing the bankruptcy and making a good offer to the Trustee. We can anticipate this during our consultation and petition preparation so you are well prepared to do so once your case is filed and your approached by the Trustee to discuss liquidation.

Also, how much of your homestead equity that you protect depends on a variety of things, such as if you are married or have children, physical disabilities, and annual income. There will also be various exemptions among personal property (such as vehicles, heirlooms, jewelry, works of art, retirement, life insurance, tools of trade, etc.). The amount of these individual exemptions will vary based on which state you live in, but luckily California provides one of the most lenient and larger exemptions. In preparing your petition, we can anticipate any red flags or liquidation issues prior to filing so we can guide you to make sure you exempt/protect as much of your assets as possible.

During your case, the Chapter 7 Trustee steps into your shoes as the owner of your assets and will administer your estate. Your estate is the collection of assets that you as the debtor own or are entitled to. The estate will belong to the Trustee for as long as the case is open. It will be important that you inform your attorney of all of your assets, even potential future assets you may be entitled to – such as inheritances, and make sure that all are listed and exempted. By disclosing all of your assets to your attorney, you stand a better chance of walking away with your assets instead of the potential of liquidation. Should an asset not be disclosed, listed, and exempted, you will lose that asset in addition to your asset being dismissed for bad faith or fraud.

The Trustee has the ability to sell any unexempt assets until the Trustee files a Notice formally abandoning their interest in the particular asset or your case closes. Just because the court has filed a Notice of Discharge, it does not mean that the Trustee has abandoned his/her interest in your unexempt assets. Liquidation can continue after discharge, before the closing of your case. Should the Trustee believe that it is in the best interest of your creditors and it is reasonably necessary, he/she can keep your case open in order to receive future payments of income or to sell properties that are not exempt, and he/she will have a right to garnish those payments if they are not exempted.

It is important that you disclose all of your assets – current and future, even if the possibility of actually collecting the asset is low – to your bankruptcy attorney to ensure your rights and assets are protected to the full extent.