Chapter 7

• Once a debtor files a chapter 7 bankruptcy petition, the clerk of the bankruptcy court transmits the petition to the U.S. Trustee. The U.S. Trustee appoints a bankruptcy trustee in the debtor's locale to administer the debtor's case. Because the debtor has filed for chapter 7 bankruptcy, he has essentially asked the bankruptcy court to forgive his debts and allow him to have a fresh start. When the bankruptcy court grants a discharge, the debtor no longer has debt hanging over his head.
  
  

Trustee's Role

• In exchange for the discharge of debts, the bankruptcy court attempts to ensure that the debtor's creditors receive some compensation. The trustee's job is to maximize the dividends paid to the creditors of a chapter 7 debtor. To do that, the trustee sells the debtor's property to recover cash to pay the creditors. In doing so, the trustee needs to decide whether or not it is prudent to sell the debtor's property. The trustee must consider whether the debtor's property will generate enough money to make a meaningful distribution to creditors before administering the case as an asset case.
  
  

Exempt Property

• When examining the debtor's property, the trustee must also consider the state exemption laws. Property that the state has deemed essential for debtors to continue living life as usual cannot be sold. Each state has its own set of exemption laws. Most states allow debtors to exempt property such as a house up to a certain value, a motor vehicle up to a certain value, home furnishings and appliances, clothing, insurance, public benefits and tools of the debtor's trade. A debtor should consult her state's exemption laws to figure out which property the trustee cannot sell to pay creditors.
  
  

No-Asset Case

• After a chapter 7 debtor compares the property he owns to the property his state lists as exempt from being sold, he may find that none of his property can be sold to pay creditors. In such an instance, the debtor has a "no-asset" case. When the trustee finds that all of the debtor's property is exempt from being sold or subject to valid liens, the trustee must file a "no-asset" report with the bankruptcy court. Fortunately for chapter 7 debtors, most chapter 7 cases are no-asset cases, and the trustee cannot take any of their property.