Most Chapter 7 bankruptcy cases are “no asset” ones. So, what’s an “asset case,” and is it a bad thing?
The bankruptcy option called Chapter 7 is sometimes called “straight” bankruptcy because it is usually the most straightforward of the options. It is also sometimes confusingly called a “liquidation” bankruptcy, wrongly implying that everything you own gets “liquidated.” But “liquidation” is an appropriate description for Chapter 7 if understood correctly. In a Chapter 7 case you receive a discharge (legal write-off) of your debts, and in return everything that you own that does NOT fit within a list of exempt assets must be turned over to your bankruptcy trustee, who then sells (“liquidates”) them and turns the proceeds over to your creditors. But for most people filing under Chapter 7, everything they own DOES fit within the list of exempt assets. So they do NOT turn ANYTHING over to the trustee, but instead get to keep it all. Nothing is in fact “liquidated.” Because the trustee receives no assets to sell and pay to the creditors, this is called a “no asset” case.
On the other hand, if you file a Chapter 7 case and have any assets which are NOT exempt—so that the trustee takes and sells them, and distributes the proceeds—that’s called an “asset case.”
But it’s important to realize that the trustee is not necessarily obligated to accept assets. He or she may choose not to for these reasons:
1. The total value of the assets to collect may be too small to justify the effort. The trustee must go through a set of formal procedures in collecting and distributing assets in a Chapter 7 case. The bankruptcy court recognizes that if the amount to be collected is relatively small, the effort to go through all the procedures may not be worth the small amount that the creditors would receive. Be sure to talk with your attorney about what is considered “too small,” because that evolves over time and may depend on your circumstances.
2. The cost and risk involved in collecting or liquidating the asset(s) may not be worthwhile. You may have an asset in the form of a lawsuit or claim against somebody that might theoretically be worth some money, but only after spending a lot in attorney fees to pursue it. The trustee may decide that the chance of winning the lawsuit or claim does not justify paying out the attorney fees. Note that Chapter 7 trustees tend to be less excited about paying such up-front costs if it’s coming out of their own pocket, instead of from the proceeds of the sale of some other asset collected in that same case.
3. An asset can be “burdensome” and not worth collecting for a variety of practical reasons. Examples include real estate tainted by hazardous waste, such as a “meth house;” a pedigree show dog that has a serious biting history; or a business with no marketable assets which is losing money every day.
But assuming that the trustee does get an asset or two from you so that you have an “asset case,” isn’t that NOT what you want if you are filing a Chapter 7 case?
Sure, in most cases you want to keep everything you own and not have it go to your creditors. But, sometimes you don’t mind giving up something, especially if the trustee pays much of it to creditors you want to be paid.
You don’t mind giving up an asset if you don’t need it any more, or if giving up that asset is much better than the alternative. For example, consider leftover business assets after the owner has shut down the business (assuming they are not “tools of your trade” needed for earning a future living). The owner decides to give up trying to make money on the business, doesn’t need or want the stuff, and would rather give the trustee the headache of divvying it up among the creditors. Just surrendering those former business assets to the trustee may well be much better than going through a 3-to-5 year Chapter 13 payment plan just to keep those assets.
If the trustee gets some of your assets (remember this includes only those assets, if any, which are not protected by exemptions), how could the proceeds from those assets possibly go to pay creditors you want to be paid? This can happen because the priority scheme through which the law directs those proceeds to be distributed is sometimes consistent with your own priorities. For example, under bankruptcy the trustee pays your accrued child or spousal support, many tax obligations, and various other categories of “priority” debts in full before paying anything to the conventional “general unsecured” creditors. You simply use the law’s priority scheme to your advantage.
To be clear, a lot of things have to fall into place correctly for your assets to flow through a Chapter 7 trustee to the debts you want or need to be paid. It’s often a delicate and even risky operation, because it involves predicting the behavior of the trustee and your important creditors, over whom you have virtually no control. The main point is that there are circumstances in which a Chapter 7 “asset case” is not such a bad thing, and indeed can be your best alternative.