What Is A “No Asset” Bankruptcy?

 

It doesn't mean you have nothing. It just means that the property you do own is either pledged as collateral to a secured creditor , and/or whatever equity you have is protected by bankruptcy exemptions — and therefore there are "no assets" available to pay unsecured creditors.

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As explained elsewhere, Chapter 7 is about collecting any available property to be distributed to your "unsecured creditors."

Non-priority unsecured creditors are "last in line" when it comes to being paid off. 

If there is nothing left to distribute to these lowest priority creditors, the case is called a "no asset case" — and the trustee just collects their $60 administrative fee. And when the debts are discharged, no property goes to the trustee. 

Most Chapter 7 bankruptcies that are filed end up being so-called "No Asset" bankruptcies — not because the debtor had no assets, but rather there were no assets available to pay unsecured creditors.

This happens because of two main factors:

  1. Property pledged as collateral: Valuable assets that are pledged as collateral to a secured creditor, are not available to be liquidated and distributed to unsecured creditors. 
    (Common collateral items are your car for a car loan and your equity in your house for a mortgage or second mortgage or line of credit.)
  2. Property & equity protected by "exemption" laws: whatever equity the debtor does have is classified as "exempt" under state or federal law.
  3. Debts owed to priority creditors, for child support and back taxes.

We explain all these concepts in other articles on this site on the law of "secured debts", "exemptions" and "creditor priority".

The main takeaway is that if all equity in your assets are exempt, your case is a "no-asset" case.


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Jurisdictional relevance: US

Legal Consumer - Amador County, CALaw. The content of this article pertains to all US states and counties.