Most Chapter 7 cases are “no-asset” ones. So, what’s an “asset case,” and is it good or bad for you?
The More Common No-Asset Case
The Chapter 7 bankruptcy option is sometimes confusingly called “liquidation” bankruptcy. That implies that something you own gets “liquidated”—sold. But in most consumer Chapter 7 cases that’s not what happens.
Under Chapter 7 you get a discharge (legal write-off) of most or all of your debts you want to discharged. In return only those things that you own, IF ANY, that do NOT fit within a set of property exemptions must be turned over to your bankruptcy trustee, who then sells them and distributes the proceeds to your creditors.
The reality is that in most Chapter 7 cases everything DOES fit within the set of applicable property exemptions. So most consumer debtors do NOT turn ANYTHING over to the trustee, and get to keep everything. Nothing is actually “liquidated.” Because the trustee takes no assets for distribution to the creditors, this is called a “no asset” case.
So naturally, if you file a Chapter 7 case and own some assets which do NOT fit within the applicable exemption, that’s called an “asset case.” The trustee has assets to take and sell, and distributes their proceeds to creditors.
Reasons Non-Exempt Assets May Not Result in an Asset Case
Just because you have assets that do not fit the applicable property exemptions does not necessarily mean you have an asset case. The trustee is not necessarily obligated to take non-exempt assets, for the following reasons:
1. The value of the non-exempt assets may be too small to justify the effort. The trustee has to go through quite a few steps in collecting and distributing assets in a Chapter 7 case. If the anticipated amount of collected assets is small, the effort going through all the steps may not be worthwhile. Talk with your bankruptcy lawyer about what your trustee may consider “too small,” because that varies with different trustees and 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 claim against somebody which may be worth some money. But it may cost a lot in attorney fees to pursue it, and there may not be a positive result. The trustee may decide that the odds of winning the lawsuit or claim do not justify paying the attorney fees.
3. An asset can be “burdensome” and not worth collecting for a various practical reasons. Examples include real estate tainted by hazardous waste, and a pedigree show dog that has a serious temperament problem.
Not Want an “Asset Case”?
Don’t you want to avoid having an “asset case,” avoid having the trustee take something from you?
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 doing so is the best alternative for you.
You may not mind giving up an asset if you don’t need it any more. You especially many not mind giving up the asset if the trustee pays the proceeds to creditors you want to be paid anyway.
Paying Your Important Creditor(s) Through Chapter 7 Liquidation
Let’s say you’re a small business owner with leftover business assets after you’ve shut down the business. (Assume these asset are not “tools of your trade” you need for earning your future living). You don’t need or want the business assets. You’d rather give the trustee the headache of divvying them up among the creditors. 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.
How could the proceeds from those assets possibly go to pay creditors you want to be paid? This can happen because of the priority rules which determine which debts get paid first. Those priority rules yield results that are often consistent with your own priorities.
For example, the trustee pays any accrued child or spousal support, some tax obligations, and various other categories of “priority” debts in full before paying anything to the conventional “general unsecured” creditors. These special debts are often the ones you want to pay, because they are often not discharged in bankruptcy. So you are simply using the law’s priority rules to your advantage.
Easier Said Than Done
To be clear, things have to fall into place correctly for this to happen. A number of considerations have to be met in order for your assets to flow through a Chapter 7 trustee to the debts you want or need to be paid.
The point is that there are circumstances in which a Chapter 7 “asset case” is not such a bad thing. Indeed it can be your best alternative.