A Chapter 7 Bankruptcy is All About the Liquidation Process

English: Part of Title 11 of the United States...

English: Part of Title 11 of the United States Code (the Bankruptcy Code) on a shelf at a law library in San Francisco. (Photo credit: Wikipedia)

A  Chapter 7 bankruptcy, commonly called liquidation bankruptcy, is all about the liquidation process. A Chapter 7 is the simplest form of bankruptcy an applicant can file. Under Title 11 of the United States Bankruptcy Code, a debtor must list all of the assets they possess when filing for bankruptcy protection. These assets include any exempt and non-exempt assets. State and federal bankruptcy laws determine which assets are exempt or non-exempt within each bankruptcy jurisdiction.

Definition of Liquidation in a Chapter 7 Bankruptcy

Liquidation is the selling of non-exempt assets in order to provide a fair distribution of the proceeds to unsecured creditors. Creditors are paid in the order determined by a priority list established by bankruptcy laws.

If a filing debtor has non-exempt assets to liquidate, the bankruptcy filing is considered to be an asset case. In asset cases, the proceeds collected from liquidation are paid out until the funds have been fully utilized or all qualifying creditors paid. If there are proceeds left over after creditors have been paid and the bankruptcy trustee receives their compensation, the remainder will be returned to the filing debtor. If the proceeds have been fully utilized to pay off the creditors, the remaining debt is discharged by the bankruptcy court from any further obligations by the debtor.

If the filing debtor has no non-exempt assets, the bankruptcy filing is considered to be a no-asset case. There is no liquidation in a no-asset case. All qualifying unsecured debt is discharged in a Chapter 7 bankruptcy when there are no asset proceeds to be distributed. When discharged, a filing debtor has no legal obligation to ever pay back the debt owed.

Liquidation in a Chapter 7 Bankruptcy is a Process

The liquidation process begins in a Chapter 7 bankruptcy the moment a debtor files for bankruptcy protection. Federal bankruptcy law governs how the process works.

The application process of bankruptcy is very important in a Chapter 7 because it establishes the financial condition of the applicant. Each applicant is not only to list any assets currently possessed, they are to list any expected future assets to be gained within 180 days from the date of filing. Failing to list or hide assets can be construed as bankruptcy fraud leading to a fine and/or imprisonment.

When non-exempt assets are determined in a case, the debtor is normally given the opportunity in a Chapter 7 to buy back the assets at a negotiated price. If the debtor cannot or is unwilling to buy back the assets, the assets are liquidated at the current fair market value, and the proceeds are then distributed.

Understanding the Liquidation Process can be Complicated

Because state and federal exemption laws can be appear to be overlapping and confusing to the average layman, understanding the liquidation process can be complicated. That is why the average bankruptcy filer needs a bankruptcy lawyer experienced in Chapter 7 bankruptcy to help them through the process.

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