In a few rare cases, the bankruptcy debtor files a Chapter 7 case that contains property with non-exempt equity. The usual case involves a vehicle that the debtor owes much less than the vehicle is worth. If the debtor’s state or federal exemptions do not fully protect the equity in the vehicle, the vehicle may be taken and sold by the bankruptcy trustee. The trustee will pay the expenses incurred during the sale, pay off the secured creditor, cut the debtor a check in the amount of the applied legal exemptions, keep a fee for himself, and then distribute any remaining sum to the unsecured creditors of the debtor.
The trustee is under a duty to get as much as legally possible from the debtor, and there are a couple general rules that guide this duty: the trustee must use ordinary business judgment, and must sell property in a commercially reasonable manner. Usually this means selling property at auction, but the trustee may also enlist a selling professional (such as a used car dealer) to maximize the recovery.
If you are asked to turn over property during your Chapter 7 bankruptcy, you have the option of purchasing the non-exempt equity from the trustee. Since there are costs involved in selling property and some risks, there is room to negotiate a fair price. For instance, if your car is worth $8,000, you owe $2,000 on the car, and you have $2,000 in legal exemptions, the trustee may ask you to pay $4,000 to purchase the non-exempt equity. However, the trustee will have to take and store the car, insure it, and pay a dealer or auctioneer. Additionally, there is some value to the trustee in avoiding the risk and work involved in selling the car (such as the title work). Consequently, the trustee may accept your counter-offer for less than $4,000. If you and the trustee cannot agree on a price, you can bid on the property at auction, or negotiate with the selling agent.
An experienced bankruptcy attorney is familiar with how the Chapter 7 trustee ordinarily negotiates the price of non-exempt property. Your attorney will explain your options and recommend your best course of action to keep your property.