What Can They Take Back During Chapter 7 Bankruptcy?


An important aspect of a Chapter 7 bankruptcy is that you, as a debtor, stand to lose property. What you will lose depends on both how you conduct your case and on what exemptions your state offers. In some cases, the bankruptcy trustee has the right to take some of your property, while in others your creditors may have the right to take back specific property directly.

Principles of Chapter 7 Bankruptcy

Chapter 7 bankruptcy refers to the section of the bankruptcy code offering debtors the opportunity to liquidate their property in exchange for a discharge of remaining debts. In theory, debtors file Chapter 7 because they cannot afford to pay their debts, so the court requires a liquidation of assets in order to grant a discharge. As it turns out, however, most Chapter 7 debtors do not have to liquidate assets because the court considers them to have no assets of value. This is due to the fact that states offer protection of certain property for debtors, usually including wages, personal property and a homestead. If you can legally protect all of your property, you have what is known as a "no-asset" case, and the court has no assets to take.

Using Bankruptcy Exemptions

The proper way to protect your assets from liquidation in a Chapter 7 case is to exempt them under your state's bankruptcy laws. Federal Bankruptcy Schedule C, which is an integral part of the total bankruptcy petition, is where you must list the property that you claim as exempt from liquidation. Next to a description of the property, you must cite the law that exempts that particular piece of property. In the remaining two columns, you must list the value of the exemption you claim and the value of the property you seek to protect. If you do not list your property as exempt on Schedule C, the court has the right to liquidate it as nonexempt property.

Dealing With Secured Creditors

If you have any property that is secured by a loan, you cannot protect it by simply listing it on your Schedule C. Rather, you must deal with the lender and strike an arrangement. Exemptions only refer to property that you protect from seizure by the court. Property that is encumbered by a loan, such as a car, is not affected by a bankruptcy exemption. Essentially, if you don't find a way to pay for your secured property, you can lose it. Your creditor has the right to take your car if you stop making payments, no matter what your bankruptcy status. One way to avoid this is to continue making payments. Another is to buy out your car for its fair market value.

Considering Alternatives

If you have assets the court considers nonexempt, there are some ways you can deal with your situation. Rather than forcing the court to find buyers for your property, you can offer to pay the nonexempt value to the court and keep the property. In some cases, you may benefit if the court decides to abandon your property. In this scenario, your bankruptcy trustee decides that just letting you keep the nonexempt is appropriate, usually because the cost of a sale would not generate sufficient income to justify the effort and expense.

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