Chapter 7 Trustee Can Take Assets Until They Are Formally “Abandoned”

A nice lady in Tennessee asked me a question.   She was in a bankruptcy case, I assume a Chapter 7.   She received her discharge of debts over three years ago.    Now suddenly her bankruptcy trustee has stepped back in and demanded certain payments owed from her ex-husband pursuant to a divorce settlement be paid to the Trustee.

Imagine her surprise!  How did this happen?

Trustee Wants Money Owed By My Ex Long After My Discharge

In the above woman’s case, long before filing her bankruptcy case she had an agreement as part of her divorce decree that her ex-husband was going to repay her for a loan she made to him during the marriage, but he didn’t need to start repaying it until 6 years later.

Two years after she made that agreement, she filed a Chapter 7 bankruptcy case.

She received her discharge a few months later, and thought everything was finished.  Then, over 3 years later when her ex-husband’s payments were supposed to start, her bankruptcy trustee stepped in and demanded the ex-husband’s payments be made to the Trustee instead of her.  That was money she was counting on!

Her confusion stems from a fundamental and common misunderstanding of how the bankruptcy process works.

The Bankruptcy Estate and Your Assets

When one files a bankruptcy case, an estate is created and it consists of, among other things, any and all assets owned by, or to which the debtor filing the bankruptcy case has a right to or interest in.  This includes common things such as real estate, vehicles, money in bank accounts, clothing, jewelry, as well as the rights to receive things like loan repayments, potential claims (right to sue) against someone, interests in corporations/partnerships, etc.

In a Chapter 7 case, all those assets belong to the Trustee on the date your case is filed.

The Trustee gets to keep and sell, pursue,  or liquidate for the benefit of the creditors in the case any and all of those assets unless the person filing the bankruptcy properly exempts  them.

How much one can exempt in assets varies from state to state and depends on which state’s exemption laws apply in your case, which depends on where you resided for the 2+ years prior to filing the bankruptcy.  See more on how to determine which state’s exemption laws apply.   (Chapter 13 and Chapter 11 are somewhat different in that the debtor remains “in possession” and ownership of their assets, but the value of the assets in part determines the amount which must be repaid to creditors).

In the case of our confused Tennessee debtor, I assume that she did NOT exempt the rights to receive her loan repayment from her ex-husband, most likely because the applicable state exemption law did not allow for it, or she was not represented by a competent bankruptcy attorney.

Can A Trustee Hold a Case Open Indefinitely Waiting For Assets?

Well, not indefinitely, but if they are pursuing assets, a Trustee can keep it open as long as necessary.

There are limits, but in the above case there was a definite starting date for the loan repayment (albeit 3 years after the bankruptcy case was filed) and the rights to receive those payments existed prior to the Chapter 7 case being filed, so the Trustee was well within his/her rights to wait for the payments to begin, and take them directly from the ex-husband.

The key here is that this asset (i.e. the right to receive payments from the ex-husband) existed on the date the bankruptcy case was filed.

A trustee can also wait to see if property values increase after a bankruptcy case is filed, such as for real estate, to see if equity is created above any exemptions.  As a practical matter, most Trustees will file paperwork (known as a “no asset report”)  stating they have no interest in any of the assets if they don’t believe there will be sufficient value, even after waiting, to benefit the creditors.

The Discharge is NOT the End of the Case

A little known fact (to non-bankruptcy attorneys, and even some less-experienced bankruptcy attorneys) is that the discharge in a Chapter 7 bankruptcy case is NOT the end of the case.  In fact, in cases where assets are being liquidated and distributed to creditors, the cases can be open for years.

Unless the Trustee has formally abandoned (given back) assets to the debtor prior, they belong to the Trustee until the bankruptcy case is CLOSED, which occurs  after the discharge is entered.    If the Trustee does not file a “no-asset report” then the case will not close.

Thus, it is important to monitor your case to see if it has been closed.  Receiving a discharge isn’t the end of the case.

Assets remain the property of the Trustee in a Chapter 7 case until the case is closed.

If a lot of time has passed without the Trustee deciding whether to sell or administer an asset, a request can be made to the court to have that property returned (abandoned) to the debtor (yet another reason to have an experienced bankruptcy attorney representing you).   Evidence would have to be shown that there is no significant value to the bankruptcy estate in the asset in question.


Image Courtesy of kristina06