Bankruptcies have become more and more common in today’s economy. There are many types of bankruptcies. You may have heard of Chapter 7 bankruptcy, Chapter 11 bankruptcy, or Chapter 13 bankruptcy. Those are probably the most common types. Most people who have heard of these types of bankruptcy, however, have no idea what they mean or the difference.
Liquidation of Nonexempt Assets Under Chapter 7
When most people think of bankruptcy, they think of two things: (1) a person’s debts will be forgiven, and (2) some of the person’s property will be taken away. Chapter 7 bankruptcies are also called liquidation bankruptcies. These people may be thinking of a Chapter 7 bankruptcy. There are other results of bankruptcy as well. For instance, a Chapter 11 bankruptcy is not a liquidation, but rather a reorganization.
In a Chapter 7 bankruptcy, the person filing the bankruptcy is called the debtor. In a Chapter 7 bankruptcy, a trustee is told to collect the debtor’s nonexempt property, or assets, and sell them. This process is called liquidation. The trustee liquidates the assets of the debtor. You should know, often a debtor’s property all qualifies as exempt and nothing is taken.
After liquidation, next the bankruptcy trustee is told to repay the debtor’s creditors with the money from the sale of the debtor’s assets.
Qualifying for Chapter 7 Bankruptcy
To qualify for relief under chapter 7 of the Bankruptcy Code, the person filing may be an individual, a partnership, or a corporation or other business entity. Relief may be available under chapter 7 irrespective of the amount of the person’s debts.
A person is not permitted to file a Chapter 7 bankruptcy if the person has had a bankruptcy petition dismissed in the past 180 days due to the person’s purposeful failure to appear before the court or comply with orders of the court, or if the person voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
In addition, no person may be a debtor under chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. There are a couple exceptions to this rule.
One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The person has no liability for discharged debts. In a Chapter 7 case, however, a discharge is only available to individual people, not to partnerships or corporations. Although an individual Chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.