When you file for Chapter 7 bankruptcy, almost all of your property becomes property of the bankruptcy estate. Because Chapter 7 is a liquidation bankruptcy, the bankruptcy trustee appointed to administer your case can sell your nonexempt assets to pay back your creditors. But you may be able to keep a nonexempt asset in Chapter 7 bankruptcy if:
- the trustee decides to abandon it
- you buy it back from the trustee, or
- the trustee agrees to accept a different exempt asset in exchange for the nonexempt property.
To learn more about what happens to your property in Chapter 7 bankruptcy, see our topic area on Your Property in Chapter 7 Bankruptcy.
What Is Nonexempt Property?
In order to protect a piece of property in Chapter 7 bankruptcy, you must be able to exempt it. Each state (and the federal system) has a set of bankruptcy exemptions that allow you to keep a certain amount of property in Chapter 7 bankruptcy. If you can’t exempt an asset, it will be classified as nonexempt property and may be sold to pay back your creditors.
For more information on how exemptions protect your property in bankruptcy, see our Bankruptcy Exemptions topic.
When Can You Keep Nonexempt Property?
The following are some of the most common circumstances that may allow you to keep a nonexempt asset in Chapter 7 bankruptcy.
The Trustee Abandons the Property
If the trustee takes your nonexempt property, there are costs associated with storing and selling the asset. In addition, the trustee is entitled to a percentage of the sale price as compensation. In general, if the nonexempt value of your property is so little that there will be nothing left for your creditors after trustee fees and sale costs, the trustee will likely abandon (not liquidate) the asset.
Example. If you own a car worth $5,250 and your state has a $5,000 motor vehicle exemption, the nonexempt portion of the vehicle’s value is $250. If the trustee sold the car, he or she must pay you the amount of your exemption ($5,000) before making any distributions to your creditors. But it’s likely that the cost of storing and selling your car and the resulting trustee fees will exceed $250, leaving nothing for your creditors. In this scenario, the trustee will typically abandon the car and you will be able to keep it.
To learn more, see Trustee Abandonment in Chapter 7 Bankruptcy.
You Can Buy the Nonexempt Property Back from the Trustee
If your nonexempt property is worth too much for the trustee to simply let you keep it, you can offer to buy the asset back from the trustee. Normally you can keep the property if you can pay the trustee the nonexempt value of the asset. But since the trustee will not have to incur additional storage and sale costs if you buy back the asset, you can usually negotiate a lower amount.
The Trustee Agrees to Take an Exempt Asset in Exchange
Most debtors in Chapter 7 bankruptcy don’t have enough money to buy back a nonexempt asset from the trustee. If you want to keep a specific nonexempt asset, you can offer to give the trustee one of your other exempt assets in exchange. In general, whether the trustee will agree to accept a different asset in exchange for your nonexempt property depends on:
- the value of each asset, and
- the cost and labor associated with selling each type of property.