Can a Debtor Request Abandonment in a Chapter 7 Bankruptcy Case?

By Patricia Dzikowski

If you file for Chapter 7 bankruptcy, you can request that the trustee abandon, or release, certain property back to you under certain circumstances. The reason for the request, the nature of your interest in the property sought to be abandoned and the time the trustee has to administer the property all may play a part in the outcome. It is rarely necessary for a debtor to request an abandonment because in a Chapter 7, which is a liquidation bankruptcy, the trustee usually abandons any property that won't benefit creditors of the bankruptcy.

If you file for Chapter 7 bankruptcy, you can request that the trustee abandon, or release, certain property back to you under certain circumstances. The reason for the request, the nature of your interest in the property sought to be abandoned and the time the trustee has to administer the property all may play a part in the outcome. It is rarely necessary for a debtor to request an abandonment because in a Chapter 7, which is a liquidation bankruptcy, the trustee usually abandons any property that won't benefit creditors of the bankruptcy.

Bankruptcy Estate

When you file for Chapter 7 bankruptcy, a bankruptcy estate is created. All real estate and personal property that you cannot claim as exempt, or protected under the law, becomes property of the bankruptcy estate. It is the trustee’s job to do what is necessary to convert the estate property to cash used to repay creditors. How the trustee does this depends on the type of property, how much it will cost to sell or liquidate, whether there are liens on the property and what the value is after deducting expenses and lien amounts.

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Abandonment

If the value of the estate property is not enough to cover the costs of sale, or pay the liens, sale of the property won't bring money into the bankruptcy estate. In such cases, the property can be abandoned. Abandonment is a formal procedure used to dispose of property when it has no or little value to the bankruptcy estate. An abandonment can dispose of all the property in a bankruptcy estate or just individual items. Property can be abandoned by the trustee, by court order, or through the closing of the case if the property was listed in your bankruptcy papers but not sold or otherwise disposed. In most cases, once property is abandoned, you get it back.

Abandonment by Trustee

The trustee can abandon property by notifying all creditors and other parties to the bankruptcy proceeding of his intent to abandon the property. The notice must identify the property, give the reason for the proposed abandonment and provide a time period for objections. Any party may file an objection. If an objection is filed, a hearing is held and the court decides. Generally, a creditor may object if it believes there is value in a property that would result in money to pay its claim. If no one files an objection to the abandonment with the court within the time provided in the notice, the trustee files a report finalizing the abandonment. Through this procedure, the property is removed from the estate and, unless the court orders otherwise, ownership and control of the property reverts to how it was before you filed for bankruptcy.

Debtor's Request

A debtor can only request an abandonment by filing a motion with the court. To be successful, the debtor must show that the property has no value to creditors in the bankruptcy. If this is not clearly established, the court is likely to allow the trustee time to determine the value and attempt to find a buyer. In such cases, it is necessary for the debtor to show how he will be harmed by the delay. A good example involves a condo with no value more than the amount due on its mortgage. Since any condominium association fees incurred after the bankruptcy is filed are not discharged, the debtor will incur additional debt if the trustee takes too long to determine the property should be abandoned.

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Do You Always Get a Notice of Abandonment From a Trustee?

References

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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.

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The law doesn't allow you to pick and choose which property you’d really rather not give up for liquidation when you file for Chapter 7 bankruptcy. If you give away property – or even sell it for less than its value – because you want to keep the asset out of the proceedings, this is a fraudulent conveyance. You might even make the transfer with no intention of doing anything wrong, such as if you're trying to try to raise some cash so you won't have to file. If you end up in bankruptcy anyway, the transfer may be a crime.

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The word "abandon" sounds alarming, but it can actually be a good thing in a Chapter 7 bankruptcy. When your trustee decides to abandon an asset, it means he's not going to exercise his right to sell it and use the proceeds to pay off your creditors. This typically happens when assets are encumbered by loans, or when an asset doesn't have much resale value. In either case, the asset wouldn't bring in much money, so a trustee might decline to force the sale.

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