In a Chapter 7 bankruptcy, whether a distribution can be made depends on several factors. A debtor has a right to declare exemptions as to his or her assets, in which the debtor will effectively declare the entire asset, or up to a certain value of the asset, off-limits to seizure by the Chapter 7 trustee. For the most part, bank accounts, household goods, clothing, cash on hand, and other mundane items will not be exposed to distribution. However, an asset secured by a lien on the collateral, most commonly a mortgage or car loan, can in theory be available for distribution. This hinges on the value of the collateral as it relates to the amount owed on the debt. In determining whether the asset is to be distributed, the Chapter 7 trustee will have to look at the amount of equity, if any, in the asset, and calculate the amount that would be left over after the asset is sold at fair market value, the trustee's administrative fees are paid, and the secured creditor is paid off in full. If there is any money left over, and is sufficient to pay a dividend to any unsecured creditor, the trustee will have the asset liquidated and make payments to creditors who have filed a Proof of Claim based on a pro rata basis. In most Chapter 7 filings that I have handled, I would say that 99% do not fall into this category. If a debtor or debtors do have assets, often they are "underwater," or the value of the lien is greater than the value of the asset. If the trustee elects not to liquidate the asset and distribute the proceeds, he will issue a Notice of Abandonment, and title to the asset will effectively revest in the debtor or debtors.
Note that in a Chapter 13 bankruptcy, distribution to creditors is the primary purpose of that particular chapter, so all Chapter 13 bankruptcies are "asset cases." Chapter 11 bankruptcies are likewise "asset cases," although very few individual debtors seek relief under Chapter 11.
The secured creditor also has the right to move the court for relief from the automatic stay, for a variety of reasons, but most commonly the lack of "adequate protection payments." What this means in simple English is that the debtor or debtors are not making the payments on the lien, and the secured creditor is seeking to assert their rights in the asset notwithstanding the bankruptcy. If the motion for relief from the automatic stay is granted, then the secured creditor may continue the process that was in place before the bankruptcy was filed, up to and including a sheriff's foreclosure sale. I should point out that this is not a common occurrence in my experience. While a secured creditor certainly has the ability to seek relief for the lack of "adequate protection," I have often noticed that a secured creditor is more inclined to wait to see what happens post-discharge.
In a very long-winded way, the answer to the question posed above is, "it depends." No two bankruptcy filings are the same, and just because I have seen something happen a certain way in the past, I cannot and will not guarantee that the same thing will happen in a similar case. If you are concerned about retention of a particular asset if you choose to seek bankruptcy protection, speak to an experienced bankruptcy attorney today.
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