What Is a ‘No Asset’ Case in A Chapter 7 Bankruptcy?

When a resident of Rockland County considers filing a bankruptcy petition, one of the crucial decisions is whether to file a petition for discharge under Chapter 7 or a petition for reorganization under Chapter 13. A decision to seek discharge under Chapter 7 can often produce what is called a “no asset” case. This is a case where the debtor has no assets that can be liquidated to pay the claims of unsecured creditors.

When the Chapter 7 petition is filed, if the debtor passes the means test that determines eligibility for a Chapter 7 discharge of debt, then the court appoints a neutral party to take possession of the debtor’s assets. The neutral party is the trustee, and the assets are the bankruptcy estate. The trustee is charged with responsibility for taking possession of the debtor’s non-exempt assets, which can include the debtor’s legal or equitable interest in any type of property. The trustee is required to sell the estate’s assets in a manner that yields the highest return to the debtor’s unsecured creditors.

The trustee must review the estate’s assets to determine if any third parties have valid liens on the property. Any assets that are non-exempt and not encumbered by liens will be sold to pay claims of creditors. In many individual cases, however, the debtor will have almost no non-exempt assets or assets that are free from liens. In such cases, the trustee files a report with the court stating that the estate has no assets and that there will be no distribution to unsecured creditors. As might be expected, most personal bankruptcies under Chapter 7 are “no asset” cases. In no asset cases, unsecured creditors will not file claims. However, if the trustee should discover non-exempt or unencumbered assets belonging to the debtor, the court will usually provide notice to creditors and giving them additional time to file claims.

A typical no asset case is processed rapidly, with no hearings before the court orders a discharge. However, if the debtor is suspected of hiding assets, or if one or more creditors have large claims, the debtor may find themselves in a complex legal situation. When this happens, debtors need to make sure they understand their legal options.