What Is Chapter 7 Liquidation?

Chapter 7 Bankruptcy grants you the opportunity to cancel all of your debts, in exchange for liquidating most of your assets.

Under the Chapter7 Bankruptcy, the court orders an appointed case trustee to take over your estate to be sold or ‘liquidated’ at government auctions and from which the proceeds will go to all your creditors. Then, you will be discharged, that is, after almost all your assets had been literally, wiped-off. Although filing for Chapter 7 Bankruptcy has a negative side, it allows others to take advantage for a fresh start from their debt. Keep in mind, the new bankruptcy limits those who can qualify for a Chapter 7 bankruptcy.

Those filing for bankruptcy must go through a “Means Test” in order to prove that they are unable to pay their debts. The debtor should be able to prove that their income is lower than the family median before opting into the bankruptcy program. Failure to meet this condition would require these debtors to have a repayment of some of their important debts (after revealing they actually can) instead of being completely relieved (‘discharged’) from most or all of it. Also, individuals who had already previously filed for bankruptcy and was once discharged from it could not file a new bankruptcy case unless the previous case had already come to pass at least 6/8 years. Inability to meet these eligibility requirements would compel the debtor to file for a reorganization or repayment plan bankruptcy instead.

In order to be qualified, the debtor must complete the credit counseling course, as well as accomplish a two page petition, and present the certificate to the bankruptcy court and creditors for evaluation. Within these bankruptcy forms, the debtor must give details about his property, current income and its sources, monthly living expenses, other debts, and any type of property that he owns (including exempt properties).

Most state bankruptcy courts also allows filers to keep equity in home, clothing, household furnishings, unspent Social Security payments, and other necessities such as a car and the tools of trade, property owned and money spent during the previous two years, and property sold or given away during the previous two years. The debtor is protected by an automatic stay once he has successfully filed for bankruptcy. Since he has already technically placed his property and the debts in the hands of the bankruptcy court, he can’t sell or give away any of the property he owns or pay off his pre-filing debts without the court’s consent.

At the end of the Chapter7 Bankruptcy process, all debts are discharged except debts that automatically survive bankruptcy as with creditor-secured debts, child support, student loans, and some tax debts, as well as court-declared creditor non-dischargeable debts due to debtor’s fraud. Take note, if applying for the near future, a mortgage after bankruptcy could be challenging.