Making Sense of Bankruptcy: What Is a No-Asset Chapter 7 Case?
May 15, 2015
Most people who file a Chapter 7 “liquidation” case don’t have anything liquidated because everything they own is protected.
Here’s the sentence we’re explaining today:
A “no-asset” Chapter 7 case is one in which the bankruptcy trustee assigned to your case determines, after reviewing your bankruptcy and related documents and questioning you at the “meeting of creditors,” that either everything you own is covered by property exemptions or whatever that is not is not worth liquidating.
Chapter 7 “Liquidation”
When you file a Chapter 7 “straight bankruptcy” usually you have two main goals: 1) to get relief from your debts 2) while not losing anything you own that you need.
This second goal of not losing anything could apply to two different kinds of things you own, those that are collateral on secured debts—such as on your home mortgage or vehicle loan—and those that you own outright. Our next blog post will be about keeping collateral. Today is about keeping other stuff that you own.
The word “liquidation” implies the selling of everything, as in a liquidation sale at a store going out of business in which every last bit of inventory is sold. And Chapter 7 is the liquidation form of bankruptcy, in contrast to the Chapter 13 “adjustment of debts.” Yet in most consumer Chapter 7 cases nothing gets liquidated—people keep whatever assets they own, and nothing goes to their creditors from those assets. That’s because either everything they own is protected through property “exemptions” or else is simply not worth liquidating from some reason or other.
Role of Bankruptcy Trustee in Chapter 7
A Chapter 7 trustee has a number of responsibilities but the main one is to determine whether the person filing bankruptcy has any assets that are worth taking and selling (“liquidating”) in order distribute among the person’s creditors.
This determination involves comparing that person’s assets to the applicable property “exemptions,” which are categories of assets that are protected from liquidation. The trustee figures out whether the person filing the Chapter 7 case owns anything that is not protected by those “exemptions.” If there is any non-exempt asset, the trustee then considers the amount of time and effort needed to take control of that asset and sell it on behalf of the person’s creditors, and whether that time and effort would be worthwhile considering the amount of the anticipated proceeds.
Documents Reviewed by Trustee
When you file a Chapter 7 case you provide information to your attorney, who prepares your bankruptcy documents, which you review and sign under penalty of perjury, and which are then filed at court. It’s extremely important that these documents be accurate and thorough, or else you could lose your right to the benefits of bankruptcy, and be penalized in other ways as well.
The trustee reviews these bankruptcy documents, especially those which pertain to the assets you own. Your attorney will send other documents to the trustee, who may also do some independent research about your assets and perhaps their value.
The “Meeting of Creditors”
About a month after your Chapter 7 case is filed you attend a so-called “meeting of creditors.” “So-called” because most of the time no creditors attend; it’s mostly a meeting of you and your attorney with the trustee. And its primary purpose is for the trustee to consider, and often to decide, whether there are any assets that can and should be taken from you and liquidated on behalf of your creditors.
The meeting is a (usually) short—seldom more than 10 minutes—but formal one, with your statements being made under the penalty of perjury. Most of the trustee’s questions will likely be about your assets, and they will mostly be to clarify the information provided in your bankruptcy documents.
At the end of the “meeting of creditors” the trustee likely will do one of the following:
ask you and your attorney to provide more information or documentation on one or more assets;
ask you to deliver and/or transfer some asset to the trustee; or
declare that he or she is satisfied that there are no assets to pursue and that therefore the case is a “no asset” one.
The last of these options is the most common one.
As mentioned above, the trustee will look to see if everything you own fits within property exemptions that you are allowed under the law applicable to your case. Most exemptions consist of a category of assets with a maximum dollar amount in value, such as an exemption for one vehicle up to $5,000 in value.
Issues could possibly arise about whether something you own actually fits within the claimed exemption category and whether what you own is worth no more than the maximum exempt amount. Those are often the issues that the trustee will ask questions about at the “meeting of creditors” or may want follow-up on after that.
Assets Not Worth Pursuing
Just because the trustee determines that you have some asset that is not exempt does not necessarily mean that he or she will want to take it from you.
First, the item may be worth so little that the proceeds “would not provide a meaningful distribution to the creditors.” In other words, going through the liquation procedure would not worth be worth the effort considering how little the creditors would receive from it. Your attorney will have a good idea what your local trustees’ cut-off amounts tend to be on this.
Second, the non-exempt asset may cost the trustee too much money to find and/or turn into cash, considering the amount of anticipated proceeds from it. For example, if you are owed money by someone who has disappeared, and/or your documentation for that debt is questionable, the trustee may not want to spend money to hire an investigator and/or any attorney to chase down this person, and then sue him or her to get paid.
Third, you may have a non-exempt asset that comes with significant risks or downsides, which the trustee does not want to inherit. An example would be a parcel of real estate with an environmental hazard. Even if such an asset has some potential value it’s the trustee’s choice whether to accept the risk that comes with the asset or to avoid that risk by abandoning the asset back to the debtor.