After you file for Chapter 7 bankruptcy, certain assets of yours—property you own—may be sold to repay your creditors. These are called nonexempt assets. Assets that bankruptcy courts consider to be either nonexempt or exempt—meaning you do not risk losing them in a bankruptcy case—vary according to state and federal law, but nonexempt assets generally include a second home, a newer model car, artworks, and jewelry.
Learn more about nonexempt assets and how they are treated in bankruptcy cases.
What Are Nonexempt Assets?
Nonexempt assets are those that can be sold by the trustee assigned to your case by a bankruptcy court. In a Chapter 7 bankruptcy, the proceeds from the sale of these assets are used to pay off or partially pay off some or all of your creditors.
The following items are generally considered nonexempt assets and can be used to repay your creditors:
- A house or other residential property that’s not your primary home
- A newer model vehicle in which you have equity
- Expensive musical instruments that aren’t needed for your profession
- A valuable stamp or coin collection
- Investments that aren't held in retirement accounts
- Valuable artwork
- Expensive clothing
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 payments as a result of your bankruptcy case.
Exempt assets that typically can not be sold to pay creditors include:
- A car in which you have only minimal equity
- Furniture and everyday clothing
- Tools required for your profession
- Retirement accounts
Exempt assets generally consist of things you need to live or work.
How Do Nonexempt Assets in a Bankruptcy Case Work?
There are state and federal laws that define nonexempt and exempt assets. The state and federal laws can vary greatly, 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.
Nineteen states—Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin—and the District of Columbia enable you to choose between the two systems.
Under federal law, you can protect as exempt assets the following amounts for these specific items:
- $25,150 of equity in your principal place of residence
- $4,000 for your motor vehicle
- $1,700 for jewelry
- $625 each for individual household items, including furniture, appliances, and clothing, with a total amount of $13,400
- $2,525 for business-essential items, including tools and books
- health aids (no set limit)
- $13,400 of loan value, accrued dividends, or interest in or from a life insurance policy
Those amounts apply to cases filed on or after April 1, 2019.
A bankruptcy attorney can review your case details and help you determine which exemption system you should use for optimal protection of assets if you live in a place where you have that choice.
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. Trustees don’t often search homes, but they can get a court order to do so if they have any reason to believe you are hiding assets.
Alternatives to Filing for Chapter 7 Bankruptcy
You might 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 you then later file for bankruptcy, your case may be affected. 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.
Certain kinds of debts, such as alimony, child support, student loans, and many kinds of taxes, will not be discharged following a Chapter 7 bankruptcy. Under some circumstances, federal, state, and local income taxes, including penalties and interest, can be discharged.
Chapter 13 bankruptcy is for those debtors who have steady income and are capable of making payments to their creditors over a period of three to five years using all of their disposable income. If you file for this type of bankruptcy, you develop a payment plan with the help of a credit counselor. You must repay your creditors at least the value of your nonexempt assets, even though those assets won't be liquidated.