People who file for Chapter 7 bankruptcy generally have very few assets. They need to pass a means test to show that they are eligible for Chapter 7, unless they qualify for an exemption from the means test. Most of these individuals do not actually hand over funds or assets to the bankruptcy trustee who is administering their proceeding. As a result, the majority of Chapter 7 bankruptcy cases are known as “no-asset cases.”
In a no-asset case, the person filing for bankruptcy keeps all of their property because it falls within the exemptions provided under federal law or the law in their state. Creditors do not get paid because the bankruptcy proceeding does not generate any proceeds. Moreover, Chapter 7 results in the discharge of most debts, so a creditor usually has no options to ever collect in the future. (There are some debts that cannot be discharged, such as student loans, taxes, and child support.) Creditors will receive a notice from the court to inform them that they will not collect anything on a debt and thus will not need to file a proof of claim.
Exempt Versus Non-Exempt Property
Since Chapter 7 is a liquidation bankruptcy, a debtor technically surrenders their assets to the bankruptcy estate, which uses them to pay off creditors. In reality, this is only true of non-exempt property. Bankruptcy law recognizes that a debtor needs to retain some property so that they can survive the process with something on which to build a future after bankruptcy. Every state has a list of exemptions that someone filing for bankruptcy can use to protect certain essential assets. Some exemptions apply to a specific type of asset, such as a car or a home. Other exemptions are known as “wildcard exemptions” and can be applied to any type of personal property that has a certain value.
The federal government also provides a list of exemptions, which are different from the state exemptions. The law in each state determines whether a debtor must use the state exemptions or can choose between the state exemptions and the federal exemptions. Your state’s specific law can have a substantial impact on the amount of assets that you can protect, since states vary widely in this area.
What If the Trustee Finds Assets Later?
In some cases, a Chapter 7 debtor tries to conceal assets from a bankruptcy trustee so that they do not need to surrender them. Or they may genuinely forget about a certain asset that they own. If the trustee later discovers the asset during the course of investigating the debtor’s situation, they can notify creditors about it. Creditors then can submit proofs of claim to collect on their debts from the non-exempt asset.
The debtor also may face penalties if they deliberately concealed an asset, and their right to continue with a Chapter 7 bankruptcy may be challenged. Therefore, you should make sure to disclose all of your assets to the best of your knowledge. If you are filing under Chapter 7 despite having non-exempt assets, you may want to consider whether Chapter 13 would be a better solution for you. Just because you meet the means test or an exemption from it does not mean that you are ineligible for Chapter 13.