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.

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.

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.

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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.

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


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

Although it may seem to defy logic, receiving a notice of abandonment from the trustee is often cause to celebrate if you've filed for Chapter 7 bankruptcy. It means he's walking away from your property, declining his right to liquidate it and pass the money on to your creditors. Sometimes a trustee neglects to issue notices of abandonment, but if he doesn't sell your property by the time you receive your discharge and the case closes, it's considered abandoned anyway. However, abandonment isn't an issue in Chapter 13 bankruptcies because you're repaying your debts from your own income, not the sale of your assets.

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Advantages & Disadvantages to Declaring Bankruptcy

Bankruptcy is a court process available by federal and state laws to help both individuals and businesses shed unsustainable debt and get back on their feet financially. It offers a second chance at a clean financial slate, but it also has disadvantages. Bankruptcy may not be your only option to resolve your debts, but its advantages may outweigh the disadvantages in your particular situation. You may wish to consult an attorney before deciding whether bankruptcy is the best option for you.


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