Chapter 7 Trustee's Abandonment of Property

 Posted on June 16, 2017 in Chapter 7

Just because you own something that’s not exempt doesn’t always mean that the Chapter 7 trustee will take it. The trustee could abandon it.

Our last blog post discussed factors that a trustee would consider in deciding whether to liquidate one of your assets. In most consumer Chapter 7 cases the trustee liquidates nothing because everything the debtor owns is “exempt,” or protected. That’s called a “no asset” case because the trustee does not claim anything for the “bankruptcy estate.”

The trustee can get interested in something a debtor owns only if it is not exempt—not protected. But even when something isn’t exempt, the trustee may still decide it’s not worth liquidating. If that’s the trustee’s decision, he or she could then “abandon” the property.

Reasons to Abandon

The United States Bankruptcy Code says that

the trustee may abandon any property of the [bankruptcy] estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

See Section 554(a) of the Bankruptcy Code.

The Chapter 7 trustee’s main job is to “collect and reduce to money the property of the estate” (to the extent the property is not exempt). Section 704(a)(1). After the trustee liquidates any non-exempt property, he or she distributes that money to the creditors.

The point is to pay creditors a part of the debts owed (or, rarely, pay those in full). So it makes sense for the trustee to not have to mess with property that won’t help in that. It makes sense for the trustee to abandon property that is either “burdensome” or “of inconsequential value and benefit.”

“Burdensome”

“Burdensome” essentially means more trouble than it’s worth. An asset can be burdensome by being a liability—for example, real estate that has a severe hazardous waste problem. And it can be burdensome by costing more to liquidate than the asset is worth—for example, a modest boat worth $1,000 but which is in such of a remote location that it would cost more than that to retrieve, market, and sell it. And the asset could be both a potential liability and cost too much to liquidate. An example would be a questionable debt owed to the debtor, which would take attorney and court fees to collect, and may also result in counterclaims against the trustee.

“Of Inconsequential Value and Benefit”

A trustee has to consider whether something is worth so little that it’s not worth the trouble to collect and sell it. The usual considerations come into play about accounting for liquidation costs in arriving at the net cash proceeds.

But there’s another overarching consideration. The net cash proceeds need to be large enough to justify the trustee’s efforts involved in an asset case. Trustees get paid a maximum of 25% of the first $5,000 collected and 10% of the next $45,000. There is more to administering an asset-distribution case than you might think. Many trustees won’t bother chasing even $1,000 net cash proceeds because the $250 fee would not be worth all their trouble administering the case. Talk with your bankruptcy lawyer to find out your local trustees’ practices. At what threshold dollar amount do your panel of trustees consider that an asset is beyond “inconsequential value”?

Deemed Abandoned

A Chapter 7 trustee can do a formal abandonment procedure through a motion to the bankruptcy court. Otherwise, everything listed on your bankruptcy asset schedules “at the time of the closing of a case is abandoned to the debtor.” Section 554(c).

Practically speaking, trustees usually don’t bother to do a formal abandonment unless they want to quickly avoid the risk of liability from a detrimental asset. Most consumer no asset cases are closed within about 100 days after filing. So at that point all your assets are deemed to be abandoned by the trustee to you.