Non-Exempt Assets in Chapter 7: What You Need to Know
Non-exempt assets in Chapter 7 are items your exemptions don't fully protect. The trustee can sell property with non-exempt equity to pay creditors. You have options to protect your assets, including buying back equity, converting to Chapter 13, or challenging valuations.
Get Free ConsultationWhen you file Chapter 7 bankruptcy, exemptions protect most of your property. But any asset not fully covered becomes a non-exempt asset. If an item has non-exempt equity, the trustee may sell it to repay creditors.
Good news: most people keep everything they own. Your property stays protected if it falls within exemption limits. If you do have non-exempt equity, you have options. You can negotiate with the trustee, convert to Chapter 13, or challenge the valuation.
Worried About Losing Assets in Chapter 7?
Find out if your property is protected or if Chapter 13 is a better option. A bankruptcy attorney can review your assets and calculate your non-exempt equity today.
Check Your Eligibility NowUnderstanding Non-Exempt Assets in Bankruptcy
A non-exempt asset is property that isn’t fully protected by bankruptcy exemptions. When protection only covers part of an item’s value, the bankruptcy trustee can take it. They’ll sell it and use the money to pay your creditors.
An asset is anything you own with value. Money, property, personal belongings all count. You list everything on Schedule A/B when you file bankruptcy.
Most Chapter 7 cases are “no-asset cases.” All property and equity gets protected by exemptions. But when exemptions don’t fully cover your property, the trustee can liquidate it. Everything depends on your non-exempt equity amount.
What Non-Exempt Equity Means for Your Property
Non-exempt equity is the portion of an asset’s value that exemptions don’t protect. You can use exemptions to shield your home, car, or personal property. When exemptions don’t cover full value, the remaining amount is non-exempt.
Here’s an example. Your car is worth $10,000. You owe $7,000 on your car loan. Your equity is $3,000. Your state’s car exemption only protects $2,000. You have $1,000 in non-exempt equity.
The trustee could sell the car in this situation. They’d give you your $2,000 exemption. They’d pay off the loan. The rest goes to your creditors. Whether this happens depends on the non-exempt equity amount and financial sense.
How Bankruptcy Exemptions Work
Bankruptcy exemptions determine what property you keep when you file. Every state has its own set of exemptions. Federal exemptions also exist. Some states let you choose between state and federal exemptions. Others require you to use state exemptions only.
In most Chapter 7 cases, exemptions cover all property completely.
Equity and Secured Debts Explained
Owning something valuable doesn’t always mean the trustee can take it. Secured loans change the situation entirely.
A secured debt ties to specific property. Car loans and mortgages are common examples. If you don’t pay, the lender can take the property back. Bankruptcy doesn’t change this right. The loan is backed by the property itself.
Even with zero equity, the lender maintains their legal claim. When property is worth the same or less than what you owe, trustees usually won’t sell. Nothing would be left over for your creditors.
What the Bankruptcy Trustee Can Do
When the trustee finds non-exempt equity, they have legal authority to sell that item. They’ll use the money to help repay your creditors. But they usually won’t act unless there’s enough equity to justify it.
Small amounts of non-exempt equity often aren’t worth pursuing. Significant non-exempt equity typically requires action. The trustee will sell the property and distribute funds in this order:
- Pay off any loans tied to the property
- Give you your exemption amount
- Use remaining funds to pay unsecured creditors
Your Options to Protect Non-Exempt Equity
The trustee will notify you before selling property with non-exempt equity. You’ll have time to decide your next move. Your attorney can help you explore these options.
You have several choices available:
Allow the Sale
If you don’t need the item, the trustee can sell it. You’ll receive your exempt portion. The rest pays your creditors.
Buy Back the Non-Exempt Equity
You can offer to pay the trustee the non-exempt equity value. Want to keep the property? Most trustees accept reasonable offers. They save time and cost by avoiding a sale themselves. Your offer can be slightly less than full value.
Convert to Chapter 13 Bankruptcy
In Chapter 13, the trustee doesn’t sell your property. You repay creditors over time through a payment plan. Your plan includes covering the value of any non-exempt assets you’re keeping. Speaking with a bankruptcy attorney for free can help you understand if conversion makes sense.
Challenge the Valuation
You can dispute the trustee’s assessment. If you believe your property lacks non-exempt equity, file a motion. Ask the court to abandon the property. When the court agrees there’s no value for creditors, the property leaves the bankruptcy estate. The trustee cannot sell it.
Making the Right Decision for Your Situation
Determining whether you have non-exempt equity affects your bankruptcy choice. Having non-exempt equity influences whether you file Chapter 7 or Chapter 13. In Chapter 7, the trustee can sell items with significant non-exempt equity. Your creditors benefit from the sale proceeds.
If you file Chapter 13 instead, you keep your property. You pay for items through the Chapter 13 repayment plan. Each option has advantages depending on your circumstances.
Working with a bankruptcy attorney helps you protect your assets. They’ll review your property and calculate your equity. They’ll apply the right exemptions to maximize protection. You’ll know exactly what to expect before you file.