Understand the Relationship Between Assets and Debts in Bankruptcy

Two train tracksRather, understand the lack of a relationship between assets and debts. This is a fundamental concept to grasp in bankruptcy. It is easiest to demonstrate this concept with a Chapter 7 bankruptcy. Two important goals in the bankruptcy process are (1) getting rid of as much debt as possible, and (2) keeping as much of your assets as the bankruptcy process will allow. Other than an exception mentioned below, these two have nothing to do with each other.

Many years ago an older practitioner used an analogy I use with clients to this day. Imagine there are two sets of train tracks running next to each other. Going down one track, the train carries your debt. The other train on the other track holds your assets. The tracks never cross. In other words, they run parallel to each other, and one has nothing to do with the other.

The debt track is automatic. From the time you file your case, the train leaves the station, and it does not stop until it crosses the line. Most Chapter 7 cases are roughly 90 days from the date of filing until you get discharge. Upon filing your case, it takes about 30 days to have a hearing with the Chapter 7 trustee at your meeting of creditors. Once you have that hearing, it triggers a 60 day window for a party to object to your discharge in bankruptcy or as to a particular debt.  More on that in a moment. The point is that the train crosses the finish line in about 90 days and your dischargeable debts are gone.

The asset track is not necessarily automatic, and the lesson here is to understand your assets and exemptions before you file your case. This is where we see some of the most common errors by both clients and attorneys. A trustee can in some cases keep a case open for years to investigate and/or administer assets; that is the exception, and not the rule. But assume that happens, it does not affect the discharge of your debts. The debt train took about 90 days to get to its destination, but it arrived. The asset train may take 100 days, one year or maybe three years to get where it’s going, but this has no bearing on discharging your debts. That train operates independent of this train.

A question I receive from beleaguered Chapter 7 debtors whose cases have remained open for months or years is “When do I get my discharge?” Usually, the discharge was already granted. The question is how do you shake a Chapter 7 trustee loose from your assets if they are holding a case open? That is a question that I will answer in another post.

Now to mention the exception to assets affecting your discharge. The way the debt train tracks cross with the asset train tracks is usually found in concealing or omitting assets. There are other ways your discharge can be affected, but specifically as to assets affecting your discharge, it is when you play games that you run into trouble. The trustee may demand something called “turnover” of your assets where you must give the trustee control of an asset. The Bankruptcy Code permits this in certain circumstances, and failure to comply can result in the trustee seeking to deny your discharge of all debts. Similarly, if you conceal or misrepresent assets, this too can lead to denial of your discharge.

Grasping the difference between assets and debts is foundational to understanding the bankruptcy process, and how long your case may last. From my experience, about 90% of the Chapter 7 cases we handle are obvious “no asset” cases. That means the trustee lets go of any interest in the case almost immediately after the 341 meeting of creditors because all assets are exempted and protected. The client therefore gets a discharge and the case closes with all assets belonging to the debtor in about 90 days. Be warned that it can take months or years of planning and timing a case so that someone filing a Chapter 7 case can “thread the needle” and get a discharge and keep all assets without issues.

As the warning goes, don’t try this at home.