Chapter 7 Liquidation
Bankruptcy is used to discharge, or wipe out, most or all of your debts. For consumers, the most common types of bankruptcy are Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is also commonly known as “Liquidation” because in exchange for the discharge of your debts, the bankruptcy trustee seizes your nonexempt assets and liquidates, or sells, them. The proceeds from the sale are then used to repay your unsecured creditors.
Out of this basic explanation of a Chapter 7 liquidation bankruptcy arises three important discussion points. First, not all of your assets will be seized by the bankruptcy trustee. The Bankruptcy Code allows for you to keep a certain amount of your assets by way of exemptions. To read more about exemptions, please see our blog about it here. The idea is that you should be able to keep all of your necessary items as you restart your financial life.
Second, for all intents and purposes, most debtors will not have any of their assets seized and sold by the trustee. Consequently, the overwhelming number of bankruptcy cases do not net any proceeds to repay back the unsecured creditors. Generally, unsecured creditors will receive nothing if a debtor files bankruptcy, and the debtor’s unsecured debts will just be discharged.
Finally, many debtors often wonder who a bankruptcy trustee is, and how the trustee has the power to liquidate their assets. A trustee’s primary function is to find and sell a bankruptcy debtor’s property and to distribute the proceeds to the debtor’s creditors. A trustee is assigned to every Chapter 7 bankruptcy. Chapter 7 trustees are appointed by a Department of Justice employee called the United States Trustee. There are approximately 21 US Trustees nationwide, and they monitor each Chapter 7 trustee to ensure that bankruptcy rules are being complied with by reviewing court papers and bringing errors to the court’s attention.