You will retain most assets
Most cases are no asset cases meaning the trustee did not collect any money or liquidate any assets of the debtor. Although most debtors have some non-exempt assets, the value is often too low for a trustee to work with
20% of earned but unpaid wages at the time of filing:
Chapter 7 Bankruptcy trustees may collect 20% of the debtor’s earned but unpaid wages as of the date of filing. For example, if the debtor is paid $1000.00 bi-weekly and files in the middle of the pay period, the trustee would be entitled to $100.00 of the debtor’s paycheck. In most cases this does not amount to much, therefore, the trustee may not open a bankruptcy estate unless there are other significant assets to liquidate (tax refunds, bank account balances, payments to insiders). Just because a trustee can cause the debtor to turn over assets does not mean he/she will. Most trustees do not open a bankruptcy estate unless there is at least $1000.00 to $1500.00 worth of assets subject to turnover.
20% of the debtor’s Bank account balances:
Assuming the debtor’s bank account balance was funded solely from wages, the trustee may cause the debtor to turn-over 20% of the debtor’s account balance as of the date of filing. For example, if the debtor had $100.00 in the bank on the date of filing, the trustee may collect $25.00 of the balance.
The Debtor’s Tax Refund unless it was spent prior to filing bankruptcy.
A trustee may take a portion of the debtor’s pending tax refund (even if the debtor has not filed taxes yet). It is therefore advisable that debtors do not overpay their taxes during the year. If you are getting a tax refund at the end of the year, you are overpaying your taxes. You should lower your deductions and attempt to break even at the end of the year. A trustee may not cause the debtor to turn over the portion of their tax refund attributable to child tax credit or earned income credit. These are exempt.
Payments to insiders (friends and family)
In some cases a debtor will have paid back debts owing to friends or family prior to filing for chapter 7 bankruptcy. Debtors are advised against doing this. The trustee may collect the funds from the debtor’s friends or family members depending on the amount they received. If the debtor paid an insider more than $600.00 in the last year, the trustee may go after the insider to retrieve the funds for the bankruptcy estate. Debtors should only pay-off debts to insiders after filing bankruptcy, never before.
Other commonly liquidated assets
These include but are not limited to: boats, trailers, recreational vehicles, expensive sports equipment, second homes with substantial equity, primary residence with more than $250,000 of equity, second vehicles, primary vehicles worth more than $15000, guns, stocks, bonds, cds and other investments which are not part of a retirement account.
Example of a Chapter 7 Bankruptcy Liquidation of Tax Refund
Let’s assume a debtor files in November of 2016. The trustee would be entitled to 11/12th of the debtor’s 2016 tax refund. November is the 11th month of the year out of 12 months which is where the figure 11/12th is derived. It is assumed the debtor funded 11/12ths of their pending tax refund. To avoid losing the tax refund, debtors are advised to reduce their withholdings so as to prevent any tax refund. Contact a tax professional for advice on your proper withholding. Why give the government a free loan? It is better to pay less in taxes and have more money during the month to cover expenses.