When a Chapter 7 Trustee Doesn't Liquidate Non-Exempt Property

 Posted on June 14, 2017 in Chapter 7

Just because you own something that isn’t exempt does not necessarily mean that your Chapter 7 trustee will liquidate it. Maybe not.

Our last blog post was about the most straightforward kind of no asset” Chapter 7 case. That’s when it’s clear that everything you own is “exempt”—fully protected. The property and exemption schedules that you and your bankruptcy lawyer prepare and file at court show this. Your trustee asks a few confirming questions at the “meeting of creditors” and announces that your case is a “no asset” one. That means that there’s nothing you own that the trustee wants to liquidate and pay its proceeds to your creditors.

But if you do own something that isn’t exempt. What happens then?

The Chapter 7 Trustee’s Task

If you have an asset which isn’t exempt from the trustee’s liquidation, he or she doesn’t necessarily liquidate it. According to the Handbook for Chapter 7 Trustees:

The trustee should consider the likelihood that sufficient funds will be generated to make a meaningful distribution to creditors prior to administering a case as an asset case.

In other words, before liquidating anything the trustee needs to decide whether it’s practical to do so. The trustee needs to consider whether enough money would come from the liquidation for a “meaningful distribution” to your creditors.

Considerations about Whether to Liquidate

The following are some of the considerations for the trustee about whether to liquidate an asset of the debtor:

1. accessibility—is it readily available or not?
2. liquidation costs—do those costs eat up a substantial amount of the anticipated proceeds?
3. marketability—is there a risk that the asset cannot be liquidated for a worthwhile price?
4. burdensome—does the asset have attributes that make is potentially detrimental to the trustee?
5. “meaningful distribution”—given the number and nature of your debts, will the creditors receive an amount worth the administrative effort involved?

Examples

1. Accessibility:

You own a boat that is worth about a $1,000. It was located 1,000 miles away in a remote area on lakeside land that got foreclosed last year. You have not seen it in two years and so are not even sure if it’s still there. Its accessibility is questionable.

2. Liquidation Costs:

Assume that you’ve had a relative verify that this boat is still in the boat shed on the property. But because of the remote and rustic location, the trustee would have to pay a substantial amount to have an agent retrieve, transport, and sell the boat. Those costs could be more than the boat is worth.

3. Marketability:

Under the same facts the boat is not readily marketable at its present location because of its remoteness. The lake is very small, with only very few other landowners who might be interested in buying the boat. There’s no marina or boat broker for a couple hundred miles, with the the nearest local newspaper nearly as far.

4. Burdensome:

The new owner of the foreclosed property does not want the boat and indeed is threatening to charge storage fees. The boat not only has no net liquidation value, it is turning into a burdensome liability.

5. “Meaningful Distribution:

Even if the facts were different so that a trustee believed the boat could net $800 after some relatively modest costs of sale, most likely the trustee would not bother. The trustee is entitled to a 25% fee, or $200 here, leaving only $600 for the creditors. If, for example, you have any “priority” debts (recent income taxes or child/spousal support arrearage), those would be paid first out of that $600 before your other debts would receive anything. Since you’d have to pay these tax/support debts anyway, there’s no practical benefit to going through all the administrative effort of liquidating the boat and distributing the proceeds. The creditors would not receive a “meaningful distribution”—nothing or close to nothing, in this example.

Next

So what happens next, once the trustee decides not to liquidate your otherwise non-exempt asset? We cover that in our next blog post about “abandonment.”