The Chapter 7 Trustee Looking into an Asset

What happens when something you own is not or may not be exempt (protected)? What does the trustee do about this and what is the end result?

 

Chapter 7 is the “liquidation” form of bankruptcy. But in our last blog post we introduced the bankruptcy trustee as an only sometimes liquidator. That’s because in most Chapter 7 cases nothing gets liquidated. Nothing gets taken from you and sold to pay your creditors. And that’s because most of the time everything you have is “exempt,” protected.

But what happens when you own something that is not covered by your allowed property exemptions?

One of two things will happen. The trustee looks into it and decides your asset is not worth liquidating after all. Or he or she may decide it is worth liquidating. We cover the first situation today, the second one in an upcoming blog post.

Three Scenarios

Your trustee may get interested in an asset of yours under these three scenarios:

• You disclose on your asset and exemption schedules that you own an asset not covered by an exemption.
• The trustee believes you may have undervalued an asset.
• The trustee disputes that an exemption you claimed applies to your asset.

We get into the first of these scenarios today.

Disclosed as Not Exempt

When filing a bankruptcy case you list your assets, or property, on Schedule A/B. Then on Schedule C you list the “Property You Claim as Exempt.”

Again, often you show that everything on Schedule A/B is completely exempt on Schedule C. But let’s say there’s something that’s shown not to be exempt. Let’s say you own a second vehicle, and your first vehicle’s value exhausts the amount of vehicle exemption available in your state. So in this scenario your second vehicle is not exempt.

So the trustee sees that and wants to check out this non-exempt asset, to see if it worth liquidating. Assume you’ve valued it at $1,000 based on the fact that it’s old, needs brakes and maybe some transmission work.

The trustee may or may not decide it’s worth taking this vehicle from you to sell and pay its proceeds to your creditors.  The trustee has a lot of discretion of deciding this.

So in this scenario he or she may ask to have you take it to a particular vehicle repair shop for an independent assessment about the seriousness of the required repairs, and the likely saleable value of the vehicle. Let’s say the repair shop verifies that your vehicle needs new brakes and has a definite transmission problem. The trustee finds out that in light of this your $1,000 valuation was fair, or maybe even a little generous.

Factors in the Trustee’s Decision

You may think that for sure the trustee will take the vehicle. After all, getting $1,000 to your creditors is better than them getting nothing, right?

But the creditors wouldn’t likely get anywhere close to $1,000, even if the vehicle sells for that much. The trustee knows that there are liquidation costs that would offset any sale proceeds. These likely include towing and storage fees, and auction or advertising costs. Plus the trustee gets paid a fee—usually about 25% of the first $5,000 collected. (See Section 326 of the U.S. Bankruptcy Code.)

The trustee will likely look at the number, amount, and the nature of the debts. If there are a lot of debts adding up to a relatively large amount, so that a very small percentage of the debts would get paid out of the vehicle sale proceeds, the trustee would be less inclined to take and sell the vehicle.

If you owe a “priority debt”—such as recent income taxes, the trustee may be less inclined as well. That’s because that tax debt gets paid before anything goes to the other debts. So if the tax debt is more than the amount available to pay out to all the creditors, all the money would go to the tax debt. No other debts would be paid. Since this kind of tax debt survives Chapter 7 bankruptcy, you would have to pay it anyway. So there’s very little practical benefit to the trustee paying part of it by selling your second vehicle.

The Relatively Detailed Distribution Procedure

Finally, there’s a fair amount of effort for the trustee involved in the distributing of funds to creditors. All creditors are given an opportunity to file “proofs of claim.”  The trustee has to review each of them to see if they are valid, objecting to those that appear not to be or that need more documentation. Then the trustee may prepare and the court sends out a notice about the proposed sale of the vehicle. Creditors and other interested parties could object to it. Then there’s a notice about the proposed distribution of the funds to creditors, which could also be objected to. Same thing with the trustee’s proposed fee (although some of these notices may be consolidated into one).

This is a lot of paperwork, over the course of several months, all of which takes effort by the trustee. Most trustees are not going to go through all that for a couple hundred dollars.

“Insufficient Assets for a Meaningful Distribution”

So, there is a good chance that in this situation the trustee would decline to take that second vehicle. He or she would formally report that there are “insufficient assets for a meaningful distribution to the creditors.” The trustee would declare the case to be a “no-asset” Chapter 7 case—there are no assets worth liquidating and distributing.