The Fate of Nonexempt Assets in a Chapter 7 Case

One of the biggest myths about filing bankruptcy is that you'll have to give up everything, but that's just not true. When you file a bankruptcy case, you must list everything you own. All of that property becomes part of the bankruptcy estate when you file your case. You are allowed to keep certain types of property so you will have something with which to launch a fresh start after the bankruptcy is over. The property you're allowed to keep is called exempt property or exemptions.

One type of property that almost always is exempt is clothing—so you won't literally lose your shirt. The only exceptions might be articles of clothing that have significant financial value to someone other than the owner, such as fur coats or diamond-encrusted garments.

Examples of Nonexempt Assets

Assets that don't fall within any exemption category are, at least theoretically, to be turned over to a Chapter 7 Trustee for liquidation so the resulting cash can be distributed to creditors.

If trustees don't want certain items, they file notices with bankruptcy courts that they intend to abandon them, and the property reverts back to the debtor. However, if a trustee wants to liquidate an asset a debtor wants to keep, the debtor can buy it from the trustee. 

The reason trustees won't want certain items is because not all nonexempt assets are useful to a trustee. Some are difficult to sell, cost too much to maintain until they sell, or just aren't worth enough. There are several examples:

Too Expensive to Maintain

A collection of rare, old documents might cost more to maintain and preserve than what a trustee can get for them in a sale unless he acts quickly. That isn't likely to happen, though. Every sale in a bankruptcy case has to be approved by the bankruptcy court after all parties have had an opportunity to object or come up with a different plan. So, the trustee is looking at a process that might take two or three months to accomplish. In the meantime, the cost of maintaining the asset is borne by the bankruptcy estate. 

Takes Too Long to Sell

Restoring vintage items and then selling them on eBay can be a lucrative practice, but it could take months to find a buyer for any individual restored item. If you have several such items when filing for bankruptcy, the trustee won't wait six months for buyers to show up, especially considering that he's likely to sell the items for a significantly discounted price.

Difficult to Sell

Some assets are too personal to the debtor. For example, if you make money from freelance writing get most of your business through a personal website. Even if the website is positioned high in search engine results and generates lots of business, would it have much value to a trustee trying to sell it, especially if you consider that the business itself requires your services to make things happen? 

Limited Value

Maybe you have been restoring a rusted out old Corvette, currently on blocks and worth about $2,000. Even though it's not exempt, the trustee isn't likely to touch it because it won't generate enough cash. In fact, a bank account of $2,000 would not likely attract much interest from a trustee. The trustee gets paid a commission based on what passes through a bankruptcy estate he's been appointed to administer. For instance, on his first $5,000, he makes a maximum of 25%. If he sold the Corvette for $2,000, he'd make $500, but the costs of the sale, let's say $200, would come out of the remaining $1,500. That leaves $1,300 for creditors. Then, he'd have to solicit claims from creditors, and maybe even challenge some of those claims if he found them lacking. All for $500. Many trustees want to have access to liquidated assets of about $5,000 before they will bother with them.