Exempt vs. Non-Exempt Assets in bankruptcy

Non-exempt assets can be lost to creditors or the bankruptcy trustee. Assets are classified as non-exempt when their value exceeds allowed state limits. Consult an attorney to determine whether your property is exempt.

Under the bankruptcy code, non-exempt property is liquidated by the trustee in a Chapter 7 case, in order to provide a fund to pay claims of creditors.  In practice, however, trustees sometimes elect not to administer (that is, collect and sell) assets that have little non exempt value because the costs of doing so will consume the dollars collected.  So, the trustee may simply elect to allow the debtor to keep assets that have only a small amount of non exempt value (such as a family pet).

Section 726 of the Bankruptcy Code governs the distribution of the property of the estate. Under § 726, there are six classes of claims; and each class must be paid in full before the next lower class is paid anything. The debtor is only paid if all other classes of claims have been paid in full. Accordingly, the debtor is not particularly interested in the trustee’s disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case.

Secured creditors whose security interests survive the commencement of the case may look to the property that is the subject of their security interests, after obtaining permission from the court (in the form of relief from the automatic stay). Unsecured creditors are generally divided into two classes: unsecured priority creditors and general unsecured creditors. Unsecured priority creditors are further subdivided into classes as described in the law. In some cases the assets of the estate are insufficient to pay all priority unsecured creditors in full; in such cases the general unsecured creditors receive nothing.

The individual debtor’s primary concerns in a Chapter 7 case are to retain exempt property and to receive a discharge that covers as many debts as possible.

Drew Broaddus