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What Is A Chapter 7 Asset Case?

Most of the time you want your Chapter 7 bankruptcy case to be a "no asset" case, not an "asset" one. But what do these mean, and when could an "asset case" be good for you?

If you file a Chapter 7 case, you usually receive a discharge (legal write-off) of your debts. In return, you allow all your assets to come under the jurisdiction of the bankruptcy court. If you own anything that does NOT fit within a list of "exempt" (protected) assets, they must be turned over to your bankruptcy trustee. The trustee then sells those assets and distributes the money to your creditors.  But in most Chapter 7 cases, everything the debtors own IS exempt, so NOTHING is turned over to the trustee. When the trustee gets no assets to sell, that's a "no asset" case.

In contrast, a Chapter 7 case which has assets that are NOT exempt-so that the trustee has assets to take, sell, and distribute-that's an "asset case."

Now, just because you own something that is not fully exempt does not necessarily mean that the trustee will necessarily take those assets. He or she may choose not to for these reasons:

1. The value of the assets may not be enough to justify taking them. A trustee does not want to go through a set of legal procedures to collect and distribute assets in a Chapter 7 case if the amount to be collected is just not worth the trouble. So there tends to be at least an informal minimum threshold below which the trustee will usually not bother to "declare an asset case." Because that threshold amount can depend on your circumstances, and even be different for each trustee, be sure to talk with your attorney about this.

2. If the asset at issue will not be easy to collect and/or sell, the trustee may decided that the cost and risks involved are not be worthwhile. Some assets are intangible, something not easily sold. So you may have a claim or lawsuit against someone which could potentially be worth money, but only after paying an attorney to pursue it.  The trustee could decide not to gamble on spending money to make more money.

3. An asset can be "burdensome" and risky to a trustee for many reasons. Bankruptcy trustees are leery about being saddled with any asset which comes with dangerous baggage. An example would be a very run down "meth house." The trustee is basically a quick liquidating agent, and does not want to buy trouble.

But IF the trustee does collect an asset or two from you, creating an "asset case," what are the consequences? Can some good come from it?

Although most of the time you'd prefer to keep everything you own, sometimes 1) you may not mind giving up something, especially if 2) the result is that money mostly gets paid to creditors that you want to be paid:

1) You may not object to giving an asset to the trustee if you don't need it any more, or if doing so beats the alternative. There are many circumstances in which a person no longer needs something and wouldn't mind giving it to the trustee. An example might be leftover assets from a defunct business. If the former business owner no longer needs the former business' equipment or inventory, the easiest route may be to just give the trustee the hassle of selling it and distributing the proceeds appropriately among the creditors.

2) If the trustee gets some of your unprotected "non-exempt" assets, the proceeds from the trustee's sale of those assets can potentially go to pay creditors which you would want to be paid anyway. This can happen because your own priorities sometimes match the law's rules about who gets paid first by the trustee. For example, the trustee pays certain child or spousal support, tax debts, and certain other unusual kinds of debts in full before paying anything to most other creditors.

Let's be clear that it's not easy to predict what will happen in these situations, because the trustee has a lot of discretion. The main point is that although most of the time you just want to have a simple "no asset" case, sometimes a Chapter 7 "asset case" is not a bad thing. In fact sometimes it is you best alternative.

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