Most consumer Chapter 7 cases are no-asset ones. This means that the Chapter 7 trustee does not take and sell any of your assets.
Chapter 7 Is a Liquidation Form of Bankruptcy
When think “liquidation,” this is what you may come to mind. A business decides to close down and files a Chapter 7 “liquidation” bankruptcy. A bankruptcy trustee gathers and sells all of the business’ assets and pays its creditors as much as it can out of the proceeds.
When you as an individual file under Chapter 7 it’s still a so-called “liquidation” bankruptcy, but it’s usually completely different. Nothing of yours is liquidated by your Chapter 7 trustee. The reason is that, unlike a corporation, you are entitled to many property exemptions. These are provisions in the law which protect what you own from your creditors. They protect your property from your Chapter 7 trustee, who acts on behalf of your creditors. Usually everything you own fits within the exemptions that apply to you, protecting everything.
That is called a “no-asset Chapter 7 case.” The trustee does not liquidate anything.
But in some Chapter 7 cases, everything is not exempt. This is called an “asset Chapter 7 case.”
In this blog post we’ll look at some practical aspects of “no-asset” cases.
Anticipating a “No Asset Chapter 7 Case”
In less than half the states, you will have the option of using your state’s property exemptions or a set of federal ones. The federal ones are in the Bankruptcy Code. (See Section 522(d).) In the rest of the states you must use the exemptions provided by the state.
In many situations it will be clear that everything you own fits within the exemptions available to you. Everything fits reasonably neatly into exemption categories. For example, you own a vehicle, and there is an available vehicle exemption. And everything you own is worth no more than the maximum value allowed. For example, your vehicle is worth $4,500 and the exemption maximum is $5,000.
So your lawyer informs you that based on the information you’ve provided, you should have a “no-asset case.” The trustee is not likely to decide that anything you own is not exempt and therefore considering taking and liquidating.
The “Meeting of Creditors”
Then about a month after filing your case, you and your lawyer attend a so-called “meeting of creditors.” Although your creditors are invited, usually none, or maybe only one or two, attend. The meeting is presided over by the assigned Chapter 7 trustee. Usually the main thing that happens is that the trustee verifies that everything you own is exempt and protected. The trustee asks you a few questions under oath verifying the accuracy of what you put on your asset schedules.
Then, depending on the personal practices of the individual trustee, he or she may announce towards the end of the meeting that it’s a “no-asset case.” If you do not hear that announcement, your lawyer will likely tell you right after the meeting that that’s effectively the situation. That’s because your schedules show that everything you own is exempt, and the trustee is not asking for further information.
The Trustee’s “No-Asset Report”
Whether or not the trustee announces it at the hearing, if the trustee determines that the case is a no-asset case he or she files a “no-asset/no-distribution report.” Here’s a sample of that simple report from the Handbook for Chapter 7 Trustees. At the heart of it is the following statement: “I… report that… I have made a diligent inquiry… and that there is no property available for distribution from the estate over and above that exempted by law.”
Next time we’ll get into what happens when things don’t go quite as smoothly as this.