A Chapter 7 case is an erase-your-debts-and-start-fresh bankruptcy. A bankruptcy trustee is appointed to liquidate assets and pay unsecured creditors. That begs the question that every debtor asks his attorney: What can the trustee take? The answer is non-exempt (unprotected) assets.
An exemption is a legal protection that shields the equity in your property from creditors (including the Chapter 7 bankruptcy trustee). Equity is the difference between the amount you owe on the property and its fair market value. An exemption to protect your equity may be found in the Bankruptcy Code, another federal law, or in a state law. Most exemptions are capped, so any equity in an asset that is over and above the exemption amount is fair game. For instance, say you own a car worth $10,000, you owe $2,000 on an allowed lien to the lender, and you are allowed $3,000 from a state legal exemption to protect one motor vehicle. The calculation to determine any non-exempt equity is the fair market value of the car minus the amount you owe minus the legal exemption, or
$10,000 – $2,000 – $3,000 = $5,000 in non-exempt equity
The Chapter 7 bankruptcy trustee can demand turn-over of a non-exempt asset. In the car situation above, the trustee can take and sell the car, pay the lender, pay you the $3,000 exemption amount, and use any money remaining from the sale to pay the costs of the sale. The trustee keeps a percentage as his fee and then divides the remaining amount among your unsecured creditors.
While it is unusual to disagree over the amount of exemptions, the debtor and trustee often have disagreements regarding the fair market value of property. In some cases the bankruptcy judge is asked to decide the value of an asset.
Non-exempt assets can be found in many sources. However, some assets are less attractive to the trustee because of the difficulties of selling the asset (e.g. a horse). Additionally, the non-exempt equity in an asset may be too little to bother. Here are a few of the easiest non-exempt targets for the trustee:
- Cash money or bank deposit
- Commissions earned but not paid
- Lawsuit settlement or judgment
- Income tax refund
- Property transferred fraudulently, especially to a family member
- High dollar unsecured property, like a house or vehicle
It is important to determine an accurate value of all property and to calculate all legal exemptions before filing bankruptcy. Then you and your attorney can discuss strategies for protecting your property.