How asset liquidation works
Chapter 7 is called "liquidation bankruptcy" for a reason. The trustee's job under 11 U.S.C. § 704(a)(1) is to "collect and reduce to money the property of the estate." In plain English: find non-exempt assets, sell them, and distribute the proceeds to creditors.
But here is the reality: more than 70% of Chapter 7 cases are no-asset cases. The trustee reviews the filing and determines that everything the debtor owns is either exempt or not worth the cost of selling. The trustee files a no-asset report, and the case moves to discharge.
Asset cases -- where the trustee actually sells property -- are the minority. But when they happen, the process is structured and governed by the Bankruptcy Code.
What the trustee can and cannot sell
Property of the estate
Under 11 U.S.C. § 541, the bankruptcy estate includes virtually everything you own on the date you file: real property, vehicles, bank accounts, investments, personal property, pending lawsuits, tax refunds, and intellectual property.
Exemptions protect most property
Every state provides exemptions that protect certain property from liquidation. Common exemptions include:
- Homestead exemption: Protects equity in your primary residence (varies wildly by state -- $0 in some states to unlimited in Texas and Florida)
- Vehicle exemption: Typically $2,500 to $7,500 per vehicle
- Personal property: Clothing, household goods, appliances
- Retirement accounts: Generally fully exempt under federal law (11 U.S.C. § 522(b)(3)(C))
- Wildcard exemption: Some states allow a flexible exemption applied to any property
If your equity in an asset is below the exemption amount, the trustee cannot touch it. Learn more at bankruptcyexemptionsbystate.com.
The liquidation process
- Trustee identifies non-exempt property during the 341 meeting and document review
- Trustee obtains appraisals to determine fair market value
- Trustee files a notice of intent to sell with the court
- Parties in interest can object within the notice period (typically 21 days)
- Court approves the sale (or resolves objections)
- Trustee conducts the sale -- private sale, auction, or negotiated sale
- Proceeds are distributed to creditors in priority order under 11 U.S.C. § 726
Abandonment -- when the trustee gives up
Under 11 U.S.C. § 554, the trustee can abandon property that is burdensome to the estate or of inconsequential value. This happens more often than you might think. If the cost of selling an asset (appraisal fees, storage, marketing, sale costs) exceeds the likely recovery, the trustee abandons it.
Once abandoned, the property reverts to you. Abandonment is the practical reason why most Chapter 7 cases end up being no-asset cases even when the debtor owns things of some value.
You can negotiate with the trustee. If the trustee wants to sell an asset you want to keep -- like a car with some non-exempt equity -- you may be able to pay the trustee the non-exempt amount to keep it. This is sometimes called "buying back" the asset from the estate.