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Keeping Real Property and Personal Property in Chapter 7 Bankruptcy

Click here for information about keeping property in a chapter 13 bankruptcy

Please note that in the large majority of chapter 7 bankruptcy cases, the trustee will not sell any of the debtors’ assets.

In a Chapter 7 bankruptcy, the trustee typically focuses on two issues. The first issue is whether the debtor meets the criteria of a Chapter 7 and is entitled to a discharge. In general, the trustee reviews the debtor’s financial situation to determine whether the debtor is insolvent and unable to pay back any of the unsecured (ex: credit card) debt. After the trustee completes the administration of the bankruptcy estate, he will make a recommendation to the judge as to whether the debtor is entitled to a discharge.

The second focus is whether the debtor owns valuable assets that may be sold. If a property is sold, the proceeds will be distributed to the creditors on a pro rata basis. If the debtor meets the criteria of a NJ Chapter 7 bankruptcy, he is entitled to a discharge whether or not any property is sold. As I explained in a separate section of this website, a debtor should know, prior to the bankruptcy filing, the approximate value of all assets and whether any assets are vulnerable to sale by the trustee. If the debtor suspects that the asset has a substantial value which may be sold by the Chapter 7 trustee, he may avoid the Chapter 7 filing or wish to file a Chapter 13 bankruptcy case.

The trustee receives a percentage of the sales’ proceeds of any asset that is liquidated and paid to the creditors. Therefore, the trustee will make detailed inquiries as to the debtor’s assets and their value. The trustee determines whether to sell an asset based on the equity (value minus creditor’s interest in the property) in the asset, and not whether the asset is a luxury or necessary item. Therefore, if there is substantial equity in a residence, the trustee may sell the residence. On the other hand, if the debtor owns a boat with no equity, the trustee is not interested in selling the boat, as he will not receive sufficient proceeds in the event of a sale.

The debtor’s petition includes the description and value of each and every asset. The trustee may perform an additional investigation of an asset’s value. Initially, the trustee determines the equity in each property. The equity in any property is the fair market value of the property minus the loan in connection with that property. For example, if a house has a fair market value of $150,000.00 and the payoff on the only mortgage is $125,000.00, the equity is $25,000.00. This means that if the debtor sold his house, he would receive $25,000.00, minus the cost of sale. A boat with a value of $50,000.00, with a financing payoff of $40,000, has equity of $10,000.00. This means that if the boat is sold, the debtor will receive $10,000.00, minus the cost of sale.

The equity of an asset for which there is no creditor financing, is the fair market value of the asset. For example, the equity of a coach, that is owned without any financing, is the fair market value of the coach. The fair market value of a $50.00 coach is $50.00.The trustee determines whether the equity of each and every property is of a certain amount that will permit a sale of that asset. Please note that it is extremely unusual for a trustee to sell furniture.

The debtor’s petition includes the estimated fair market value of each asset, the creditor’s interest in each asset, and the exemption that is applied to each asset. The list of exemptions are reflected on a separate page of this website. After the equity is determined, the next step is to subtract the exemption amount for that particular property from the equity of that property. This analysis must be completed for each asset or property. If the amount of the exemption is more than the equity of that property, the trustee may not sell the asset.

Household goods include furniture, appliances, etc. The following example represents a single debtor who may keep all household goods after applying his federal bankruptcy exemptions, because the exemptions are in excess of the household goods’ value. Please note that it may be possible to use additional exemptions towards any property, which is called the, “wildcard” exemption.

  • aggregate value of household goods
  • federal bankruptcy exemptions for household goods
  • $9,000.00
  • $10,775.00

In the following example, the trustee would be permitted to sell the single debtor’s household goods. However, the trustee is required to pay the debtor $10,775.00 from the proceeds, with the balance of $19,225.00 to be disbursed to the creditors pro rata, after the trustee’s commissions and cost of sale.

  • aggregate value of household goods:
  • federal bankruptcy exemptions for household goods:
  • $30,000.00
  • $10,775.00

The following is an example of an analysis regarding a single debtor’s residence. Under this scenario, the debtor may keep his house in a chapter 7 because there are no available funds after the application of the exemptions.

  • Fair market value of the residence;
  • Mortgage payoff:
  • Balance after subtracting the payoff
  • Residence exemptions
  • Balance after subtracting exemptions
  • $200,000.00
  • $190,000.00
  • $10,000.00
  • $22,500.00
  • (-$12,000.00)

The following is an example of an analysis regarding a single debtor’s residence. The trustee will sell the debtor’s property because after the application of the exemptions there are substantial funds available for creditors. However, the debtor will be paid $22,500.00 prior to the disbursement to creditors. Also, after the creditors are paid in full, the debtor will receive the balance.

  • Fair market value of the residence;
  • Mortgage payoff:
  • Balance after subtracting the payoff
  • Residence exemptions
  • Approx. costs of sale
  • Balance after subtracting exemptions and costs of sale
  • $300,000.00
  • $190,000.00
  • $110,000.00
  • $22,500.00
  • $30,000.00
  • $57,500.00