Although it may seem to defy logic, receiving a notice of abandonment from the trustee is often cause to celebrate if you've filed for Chapter 7 bankruptcy. It means he's walking away from your property, declining his right to liquidate it and pass the money on to your creditors. Sometimes a trustee neglects to issue notices of abandonment, but if he doesn't sell your property by the time you receive your discharge and the case closes, it's considered abandoned anyway. However, abandonment isn't an issue in Chapter 13 bankruptcies because you're repaying your debts from your own income, not the sale of your assets.
Why the Trustee Abandons Assets
Although Chapter 7 works on the premise that the trustee can sell your assets to raise money to pay your creditors, this actually doesn't happen all that often. Bankrupt debtors can use state or federal exemptions, provided for under the Bankruptcy Code, to protect their assets – protecting them from the bankruptcy proceedings. If an exemption doesn't cover the full value of an asset, the trustee can liquidate it and give the balance of the proceeds to your creditors -- the portion left over after the exemption and any liens against the property are satisfied.
If the non-exempt value is limited, however, he may not want to go to the time and trouble of selling the property. For example, if your home is worth $275,000, the mortgage against it is $250,000, and you apply a $22,500 exemption to the equity, only $2,500 could conceivably go to your creditors. The costs of the sale would take a good bite out of this, so each of your creditors would receive very little. If there's no sense in liquidating the property, the trustee may issue a notice of abandonment, indicating the reason why he is declining to do so.
Read More: What Happens if the Trustee Abandoned an Asset?
Your creditors have a right to object to the abandonment when they receive notice of the trustee's intentions. If a creditor notifies the court within 14 days, the court will schedule the matter for a hearing. There's typically no reason for your creditors to object if no significant money would have been available to them, however. If no one objects within 14 days, the abandonment is official.
Effect of Abandonment
When you file for bankruptcy, you give the trustee control of your property, to do with as he sees fit. When the trustee abandons an asset, this typically has the effect of returning control and ownership back to you. You can now do anything you like with the property – the trustee has given it up. In some cases, however, the trustee might abandon the property to a third party. This might happen if a lien exists against a certain asset and the lien is equal to or more than the asset's fair market value. The trustee would relinquish the property to the lienholder instead, who is the rightful owner if you've defaulted on the debt and don't intend to reaffirm the loan, taking it out of the bankruptcy proceedings and continuing to pay it.
A trustee may want to leave his options open while your bankruptcy case is pending, declining to issue a notice of abandonment until the eleventh hour. He might want to wait to see how your case plays out before he returns the property to you. If he doesn't get around to issuing a notice of abandonment before he closes your case and the court grants your discharge, courts have ruled that your property is "technically" or automatically abandoned if he doesn't sell the asset by this time. The trustee can't come back to you after the fact, demanding that you turn it over to him so he can sell it.
Beverly Bird is a practicing paralegal who has been writing professionally on legal subjects for over 30 years. She specializes in family law and estate law and has mediated family custody issues.