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What happens to my property in a Chapter 7 case?

Will a person lose all of his or her property if she or she files a chapter 7 case?
Usually not.  Certain property is exempt and may not be taken by creditors unless it is encumbered by a valid mortgage or lien.  A person is usually allowed to retain his or her unencumbered exempt property in a chapter 7 case.  A person may also be allowed to retain certain encumbered property that is reaffirmed, redeemed or otherwise subject to an avoidable lien.  Encumbered property is property against which a creditor has a valid lien, mortgage or other security interest.

What is exempt property?
Exempt property is property that is protected by law from the claims of creditors.  However, if exempt property has been pledged to secure a debt or is otherwise encumbered by a valid lien or mortgage, the lien or mortgage holder may claim the exempt property by foreclosing upon or otherwise enforcing the creditor’s lien or mortgage.  In bankruptcy cases, property may be exempt under either state or federal law.  Exempt property typically includes all or a portion of a person’s unpaid wages, home equity, household furniture, and personal effects.  Your attorney can inform you as to the property that is exempt in your case.

What is a trustee in a chapter 7 case, and what does he or she do?
The trustee is a person appointed by the United States trustee to examine the person who filed the case, collect the person’s nonexempt property, and pay the expenses of the estate and the claims of creditors.  In addition, the trustee has certain administrative duties in a chapter 7 case and is responsible for seeing to it that the person filing performs the required duties in the case.  A trustee is appointed in a chapter 7 case, even if the person filing has no nonexempt property.

What are the responsibilities to the trustee of the person filing the case?
The law requires the person filing to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of the person’s nonexempt property.  If the person does not cooperate with the trustee, the chapter 7 case may be dismissed and the person’s debts will not be discharged.  

What happens to property that is turned over to the trustee?
It is usually converted to cash, which is used to pay the fees and expenses of the trustee, to pay the claims of priority creditors, and if there is any left, to pay the claims of unsecured creditors.

What if the person has no nonexempt property for the trustee to collect?
If the person filing has no nonexempt property, a notice will be sent to the creditors advising them that there appears to be no assets from which to pay creditors, that it is unnecessary for them to file claims, and that if assets are later discovered they will be given an opportunity to file claims.  This type of case is referred to as a no-asset case.  Most chapter 7 cases that are filed by consumers are no-asset cases.