When filing for Chapter 7 bankruptcy, you risk losing property in the case. The bankruptcy trustee appointed to oversee your matter will sell any property you can't protect with a bankruptcy exemption and distribute the funds to creditors. But the trustee will sell property only if it will bring money for creditors. If not, the trustee will abandon the property, and you'll get to keep it.
Learn more about:
For targeted information, check out our quick ten-question bankruptcy quiz—it can spot potential bankruptcy issues fast. Also, make sure you're prepared for what happens after bankruptcy by learning about the downsides of bankruptcy.
The bankruptcy trustee can abandon property that won't bring money for creditors, and in most instances, the property will return to you. Abandonment can occur when:
Suppose your tractor is worth $10,000, which is $2,000 less than you owe on the loan. Because the trustee must pay off the $12,000 loan before distributing funds, creditors would not benefit from the sale, and the trustee won't sell the tractor.
The same principle would apply if you exempted all the property's equity with a bankruptcy exemption. The trustee would also abandon the property if the available equity were too small to cover the costs of taking possession, storing, insuring, and selling the tractor.
The abandonment procedure varies depending on when it occurs.
To abandon property while a bankruptcy case is pending, the trustee gives the creditors written notice that the trustee intends to abandon specific property, tells the creditors why, and gives creditors at least 14 days to file a written objection to the abandonment with the bankruptcy court. If the judge overrules an objection or no one files one, the judge will deem the property abandoned. Procedures might vary under local rules.
If the trustee closes the bankruptcy case before administering all property, the court will consider any remaining property listed in the petition abandoned. This rule doesn't apply to property you concealed or failed to disclose in your bankruptcy paperwork.
Anyone with the legal right to possess the property—usually you. However, it could go to a creditor with legal possession. For instance, the lender might retain property recovered through foreclosure or repossession.
Anyone with a legal interest in the property can ask the court to order the trustee to abandon the property. You'll need to prove that the property has no value to the bankruptcy estate or that giving the trustee more time to sell the property would be detrimental to you. A motion to compel an abandonment is rarely necessary because a bankruptcy trustee earns a percentage of the funds distributed to creditors. A trustee will abandon a property willingly if selling it won't benefit creditors.
Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.
The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.
More Bankruptcy Information
You'll find fillable, downloadable bankruptcy forms on the U.S. Courts bankruptcy form webpage.
We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like How to File for Chapter 7 Bankruptcy by Attorney Cara O'Neill and Albin Renauer, J.D.
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.