Most Chapter 7 cases that I handle as a Michigan bankruptcy attorney are “no-asset” bankruptcy cases, meaning that, after I have exempted the filing individual’s personal assets from the bankruptcy estate created by the filing of the bankruptcy petition, there is nothing left available for the Trustee to liquidate (seize and sell off for cash) and distribute to creditors. In fact, the great majority of Chapter 7 bankruptcy cases filed anywhere are “no-asset” cases of this sort.
However, some cases are “asset” cases that do involve a transfer of assets from the filing individual’s ownership to the creditors whose debts he or she is discharging by way of the Chapter 7 Trustee assigned to the case, whose job is to do just that.
Sometimes, however, a filing individual does have more property or more cash assets in their possession than the exemptions in the Bankruptcy Code allow me to protect. (The exemptions are bits of the Bankruptcy Code statute that allow me to remove up to certain dollar-amounts of certain types of property from that legal “bankruptcy estate” containing otherwise everything the individual owns or is owed at the timing of the filing of the case.) These cases are called “asset” cases.
Usually, the available bankruptcy exemptions are sufficient to protect, if not ALL of somebody’s property, nearly all of it and what the Trustee manages to liquidate and distribute to creditors is less than what the individual owes to their creditors. This is sometimes only a few thousand dollars or less, which may be a small price for the individual to pay to discharge and walk away from tens of thousands or hundreds of thousands of dollars’ worth of debt.
Occasionally, however, the asset liquidated by the Trustee may be quite valuable. On extremely rare occasions, its value may outstrip the total dollar amount owed to the individual’s creditors.
Of course, this is rare because the calculation by the filing individual of the worthwhileness of the bankruptcy’s filing in the first place may be premised upon the fact that they will lose less to the Bankrutpcy Trustee than they owe; if they could simply sell off a valuable asset in order to pay creditors off and avoid bankruptcy in the first place, this is generally preferable. When this occurs, it may be because a filing individual has underestimated the value of an asset, did not realize that they owned it in the first place (e.g., a piece of real estate titled to them by an elderly relative without their knowledge, etc.), or for other reasons.
What happens then?
The Trustee takes a small percentage of the amount distributed to creditors, naturally. After that, however, Section 726 of the Bankruptcy Code governs how creditors are paid and in what order. Creditors are paid by the Trustee according to the timing of the claims that they file with the Bankruptcy Court when the Trustee alerts them that there is an asset to be distributed and according to their classification as “secured” creditors (holding debts with collateral attached to them) or “unsecured” creditors (holding debts with no collateral attached to them). Interest owed is paid as well, under certain circumstances.
However, after all creditors have been paid in accordance with Section 726, the Debtor him- or herself (i.e., the individual who filed the bankruptcy) is then paid.
In other words, you can only pay 100% of what you owe–and no more. If an asset liquidated by the Trustee brings more money to the Trustee for distribution to creditors than those creditors are actually owed, the filing individual will get money back from the Trustee. Eventually. (This distribution process can take months or years to complete.)
If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or firstname.lastname@example.org to schedule a free, initial consultation.