Chapter 7 and Abandoned Collateral

By Mary Jane Freeman

Filing for bankruptcy is often the first step in achieving a fresh financial start. But when you file for Chapter 7 bankruptcy, several things must take place before staring afresh. First, you must hand over your assets to a trustee so that they can be sold to pay your creditors. This is often one of the hardest parts of the process. Sometimes, however, the bankruptcy trustee decides to abandon an asset, allowing you to keep it.

Filing for bankruptcy is often the first step in achieving a fresh financial start. But when you file for Chapter 7 bankruptcy, several things must take place before staring afresh. First, you must hand over your assets to a trustee so that they can be sold to pay your creditors. This is often one of the hardest parts of the process. Sometimes, however, the bankruptcy trustee decides to abandon an asset, allowing you to keep it.

Chapter 7 Overview

Debtors usually file for bankruptcy under two common procedures: Chapter 7 and Chapter 13. Chapter 7 is known as liquidation bankruptcy because the trustee assigned to your case seizes your nonexempt assets to liquidate. The proceeds are used to pay your creditors. Any remaining unpaid debts are discharged by the bankruptcy court, thus extinguishing your liability.

Get a free, confidential bankruptcy evaluation. Learn More

Bankruptcy Estate

The trustee seizes your assets and places them into your bankruptcy estate, which represents your property eligible for liquidation. Once an asset is placed in the estate, it no longer belongs to you. It is under the ownership of the estate. The only way to protect your property, and keep it for yourself, is to claim an exemption for it. Exemptions are categories that protect your property from seizure up to a certain value; they are available under both state and federal laws. Some states allow you to choose between federal and state exemptions, while others require the use of state exemptions. The homestead exemption is a common exemption debtors use. For example, you can protect up to $24,060 of your home equity under the federal exemption or up to an unlimited amount if you live in Florida and use the state's exemption.

Abandonment

If you are unable to protect an asset with an exemption, you have no choice but to give it up to the bankruptcy estate. But there are two occasions when the bankruptcy trustee can choose to abandon an asset and release it from the bankruptcy estate. When the asset is too burdensome or too low in value to sell to benefit the estate, the trustee can ask the court for permission to abandon the property. Also, if an asset has not been liquidated despite the conclusion of the bankruptcy case and subsequent debt discharge, the asset is automatically abandoned.

Use of Abandoned Property

Once property is abandoned in a bankruptcy proceeding, it returns to the rightful owner. In most cases, this is the debtor. However, if the property was encumbered in some way, such as by a mortgage, it is returned to the party with the superior ownership interest. This can be a bank or other secured creditor. The party who receives the abandoned property is free to take the asset and do what he wants with it.

Get a free, confidential bankruptcy evaluation. Learn More
Can a Bankruptcy Court Freeze My Bank Account?

References

Related articles

Do I Have to Give Up My Assets if I Am Declared Bankrupt?

There are two types of personal bankruptcy, Chapter 13 and 7. Chapter 13 does not require the person declaring bankruptcy -- referred to as the debtor -- to get rid of any of his assets. Instead, the debtor proposes a repayment plan and makes payments to his creditors over a period of three to five years. With Chapter 7 bankruptcy, the trustee may sell some of the debtor's assets, but not all of them. Certain assets are exempt from the bankruptcy process to ensure that the debtor can provide for himself after bankruptcy.

How Long After Discharge Can a Trustee Take Assets?

Debtors often believe that when they receive a bankruptcy discharge, their case is over, but this isn't always true. Your bankruptcy case remains open, and the trustee can reach your property indefinitely until he either abandons the particular asset or files a no-asset report with the court.

Ways to Exempt Your Refund in a Bankruptcy

If you're contemplating bankruptcy, you probably have a thousand thoughts running through your mind. At the top of that list are probably concerns about your taxes and what happens once you file. If you are expecting a tax refund, you may be especially worried. Before you decide whether or not bankruptcy is for you, it may help to understand how your filing could affect your refund and what steps you can take to protect it in your effort to create a fresh financial start.

Related articles

What Is Considered Exempt in Chapter 7 Bankruptcy Law?

When you file for Chapter 7 bankruptcy, any assets you have may be seized to pay your obligations. However, pursuant to ...

What Can You Keep in a Connecticut Bankruptcy?

Depending on the type of bankruptcy you file and the types of assets you have, you may be able to keep many of your ...

Can the Bankruptcy Trustee Force the Sale of an Inherited Property?

Like everything else you own when you file for bankruptcy, property you inherited before the bankruptcy becomes ...

Bankruptcy Laws and Codes for Idaho

During tough economic times or unexpected financial hardship, people often seek financial relief by filing for ...

Browse by category