What Are Nonexempt Assets in a Bankruptcy Case?
Understand which property is not safe from liquidation
In a bankruptcy case, particularly Chapter 7 bankruptcy, the court considers your property as possible means for paying back your creditors. Once you file bankruptcy, all your property becomes part of the bankruptcy estate. Based on the bankruptcy law, certain property is exempt from being sold to repay your creditors, while other property is not exempt. The property that is not exempt is called your nonexempt assets.
Nonexempt Assets in a Chapter 7 Bankruptcy
Nonexempt assets include any property that can be sold by the court. In Chapter 7 bankruptcy, the proceeds from the sale of these assets are used to pay off some or all of the creditors. If you’re considering Chapter 7 bankruptcy, know that you risk losing some of your property to pay off your debts.
However, if you do not have any nonexempt assets, your case is called a “no asset” case. There is no property for the bankruptcy court to sell and your creditors won’t receive any payment through your case.
Nonexempt Assets in a Chapter 13 Bankruptcy
Even though Chapter 13 filers enter a repayment plan for their debts, nonexempt assets are still important for the bankruptcy case. In Chapter 13 bankruptcy, the debtor must repay the creditors at least the value of nonexempt assets, even though the assets won't be liquidated.
Federal and State Laws for Nonexempt Assets
There are state and federal laws that define exempt and nonexempt assets. These laws often differ in some areas, so much so that some states allow you to choose whether to use the state or the federal exemption system in your bankruptcy case. You might choose the federal exemption system, for example, because it allows you to keep certain property that your state’s exemption system would not.
A bankruptcy attorney can review your case details and help you determine which exemption system you should use for optimal protection.
Examples of Nonexempt Assets
Keep in mind that what qualifies as nonexempt assets can vary from one state to another depending on state law. These items are generally considered nonexempt assets and can be used to repay your creditors:
- Property that’s not your primary home
- A newer model vehicle with equity
- Expensive musical instruments that aren’t needed for your business
- A valuable stamp or coin collection
- Valuable artwork
- Expensive clothing
What Happens to Your Assets
If you have nonexempt assets in your bankruptcy case, your creditors will file a claim against the assets to get a distribution from the bankruptcy estate. The trustee will take the assets, sell them, and distribute the proceeds to the creditors who have filed a claim. The trustee may decide not to use some of your nonexempt assets if they aren’t worth much or would be too difficult to sell.
You’re expected to be honest in listing your assets. The U.S. Trustee’s office may take action if they have reason to believe you're hiding anything. Trustees don’t often search homes, but they can get a court order to do so if they have any reason to be suspicious.
How to Avoid Losing Assets
Instead of filing bankruptcy, consider selling your assets on your own and using the money to pay or settle your debts. It’s more work for you, but it allows you to avoid having a bankruptcy on your credit report.
However, note that if you try to sell assets so you won’t have to give them up in bankruptcy, and then later file bankruptcy, your bankruptcy case may be in trouble. The court will analyze your intent in selling the assets and make a decision about whether you were trying to hide assets or defraud the court. The trustee may recover the sold assets, seize some of your exempt property, or even deny a discharge of your debts.
If you’ve already filed Chapter 7 bankruptcy, the trustee may let you keep the asset if you can afford to pay the value of the asset. Or, you may be able to exchange a nonexempt asset for an exempt asset. Converting to a Chapter 13 bankruptcy may also be an option. It's best, however, to make any bankruptcy decision with a clear understanding of the risks to your personal property.
The Bankruptcy Site. "Bankruptcy Exemptions – What Do I Keep When I File For Bankruptcy?" Accessed March 3, 2020.
United States Courts. "Chapter 7 - Bankruptcy Basics." Accessed March 3, 2020.
United States Courts. "Chapter 13 - Bankruptcy Basics." Accessed March 3, 2020.
Nolo. "What Is Nonexempt Property in Bankruptcy?" Accessed March 3, 2020.
Nolo. "Will the Bankruptcy Trustee Come to My Home to Collect Property?" Accessed March 3, 2020.
HG.org. "Things to Consider When Selling Assets Before Filing Bankruptcy." Accessed March 3, 2020.