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.
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.
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.