Individuals who need a financial fresh start may elect to file bankruptcy, either under Chapter 7 or Chapter 13 of the Bankruptcy Code. Both types of bankruptcy are governed by federal rules such as Rule 6007, which addresses abandonment of property in Chapter 7 cases. This rule may allow you to keep some of your property out of a Chapter 7 bankruptcy proceeding as long as your creditors don’t object.
Chapter 7 Versus Chapter 13
Chapter 13 bankruptcy provides an opportunity for a debtor to have his debts adjusted if he has a regular income. This type of bankruptcy includes creating a repayment plan over three to five years in which the debtor pays a bankruptcy trustee, who disburses the funds to the debtor's creditors. Chapter 7 bankruptcy, on the other hand, forces the sale of the debtor’s nonexempt assets to pay off creditors. As part of this liquidation process, some property may be abandoned under Rule 6007.
Bankruptcy Code and Rules of Procedure
The Bankruptcy Code is a set of federal laws that govern bankruptcy, including types of bankruptcy and definitions of legal terms used in bankruptcy proceedings. The Federal Rules of Bankruptcy Procedure direct bankruptcy courts and trustees on how to carry out their tasks, including liquidation of a debtor’s property. Section 554 of the Bankruptcy Code states that certain property can be abandoned when it is too burdensome to the bankruptcy estate or has little value. Rule 6007 of the Rules of Bankruptcy Procedure directs the court and trustee on how to abandon such property.
In a Chapter 7 bankruptcy, a trustee is appointed to take possession of a debtor’s nonexempt property and liquidate it. “Property” in the bankruptcy code is defined very broadly; it means all legal and equitable interests of the debtor and any community property of the debtor and his spouse. Thus, nearly everything you own, except for exempt property like small amounts of household items, is subject to liquidation in a Chapter 7 bankruptcy. The bankruptcy trustee will often arrange for public sales or auctions and then use the proceeds to pay your creditors.
The trustee may choose to abandon property rather than selling it if the property has little value, or if the cost of selling it and the resulting taxes would exceed the value of the property. For example, if you have a vehicle that is worth $5,000 but you owe $6,000 on it, selling the vehicle wouldn’t make sense because no money would be left over for creditors after the existing loan was paid off. Abandonment occurs on motion during the case or automatically at the conclusion of the case, and abandoned property is not considered part of the bankruptcy estate.
Requirements of Rule 6007
Rule 6007 is divided into two subsections. The first addresses the parties that must be notified about the abandonment by the trustee or debtor in possession of the property, including creditors. Any interested party may file and serve an objection to the property abandonment, and the court will hold a hearing to decide whether the property should be abandoned. Subsection (b) of Rule 6007 allows an interested party to file and serve a motion requesting that the court force the trustee or debtor in possession of property to abandon the property.