Because a Chapter 7 bankruptcy allows you to erase all of your dischargeable debt (which is a pretty great deal), the government requires that you be in a truly tight spot and without means to pay your creditors. The bankruptcy code has done its best to define this "truly tight spot" by setting limits on how much equity you can have in your assets. If your total equity exceeds these limits by more than a few hundred dollars, you may have to pay something to the trustee to proceed with the bankruptcy.
A few definitions and explanations
Dischargeable: A debt that can be erased by a bankruptcy. Most debts are dischargeable and will be eliminated at the end of your case when you receive your discharge. Debts that are not include student loans, fees and fines associated with criminal convictions, taxes that are recently owed or recently filed, and debts that are assigned to you in a divorce decree or domestic support order.
Trustee: The person in charge of making sure that you are telling the truth about your assets and, if appropriate, collecting money from you and distributing it to your creditors. This person is essentially an independent contractor for the federal government.
Asset: Anything you own, are owed, share title to, or could otherwise sell or exchange for cash. E.g. Your car, your refrigerator, your pet chickens, your mattress, your savings account, that half acre of land in Montana that you share title to with all six of your siblings, client lists for your business, guns, and even money owed to you by someone else, including your employer or next door neighbor.
Equity: The difference between what you owe and what an item is worth. For example, your mattress is probably paid off (let's assume it is); if you could sell it for $100 then you have $100 of equity in your mattress. More commonly an issue in bankruptcy is the equity debtors have in a vehicle; if you have a 2001 Ford Taurus worth $5,000, and you only owe $2,200 on it, then $2,800 is equity.
Exemption: The amount of equity you are allowed to have in an asset, or set of assets. These values differ by state. Here are some of the most important exemptions and their limit in Oregon:
How do I know if I have too much equity?
Whether or not you have excess equity in your assets should be determined by you and your bankruptcy attorney prior to filing, usually with the help of several pieces of documentation such as a Current Market Analysis on your home or a Kelly Blue Book report on your car. If you do appear to have too much equity there are several options:
If you do have excess equity - generally more than $750 in excess - the trustee will declare that you have an "asset case". At this point, all excess equity will be tallied and you will make arrangements to pay that amount.
I still don’t understand. Why do I have to pay? I’m already broke!
The Technical Answer: When you file bankruptcy you are essentially giving everything you own to the trustee (it's called your "bankruptcy estate") in exchange for having all of your dischargeable debt wiped out. The trustee decides if there is excess equity above the allowed exemptions. If he or she doesn’t see any, which is often the case, you will be able to keep all of your belongings and pay nothing extra. If your assets do exceed allowable limits the trustee is required to sell those assets (usually to you) and pay your creditors.
The Somewhat Philosophical Answer: Your creditors are, by contract, entitled to collect on the debts you are asking to be erased. It is only fair for them to get something from you if you happen to have items that could be sold to pay them back. Thankfully the government has decided there is a bare minimum that any person should be allowed to have without fear of those funds or those items being garnished, repossessed, or sold at auction. However, if you are Donald Trump, we as a society don’t think you should be able to wipe out your debt and keep all of your stuff.