What is non-exempt equity why do I can about it in bankruptcy? In order to answer this question, a few terms need to be defined. First, equity is the value property has beyond any amount owed. Second, non-exempt means there is no statue or law the protects the asset from creditors. With that clarified, non-exempt equity is property that has value that cannot be protected so it’s value can be sought after by creditors.
This is an especially important topic in bankruptcy because it means that any property with non-exempt equity can be seized by the court-appointed Trustee. The Trustee will then liquidate the property and use the proceeds to pay the creditors included in the bankruptcy case. This is not necessarily a bad thing, unless the non-exempt property is something you want to keep. Then the question becomes, How do I keep property that has non-exempt equity? Really, there are 2 answers to that question.
First, non-exempt property in a Chapter 7 case may be purchased from the bankruptcy estate. That means the value of the property in case can be given to the Trustee in exchange for keeping the property. This allows the debtor to keep the property and still allows the Trustee to distribute funds to the creditors.
Second, non-exempt property can be protected in a Chapter 13 case. A Chapter 13 case allows a debtor to make payments to the Trustee over a period of 3 to 5 years. The payments must equal the value of the non-exempt equity, but the debtor gets to keep the property.
So, non-exempt equity can make a big difference in bankruptcy. It is important to identify any asset with non-exempt equity and create a plan on how that asset will be treated in order to have a successful bankruptcy case.