Liquidation In Chapter 7: 3 Things You Should Know

Lawyers often call Chapter 7 bankruptcy the liquidation branch of bankruptcy due to the way it works. Liquidation is a part of Chapter 7, and it is essential to understand how it works before you file. If you want to use this branch of law, here are three things to understand about liquidation before filing. 

What It Means

Liquidation refers to selling things with the intent of raising money to pay off debts. Liquidation is something that Chapter 7 bankruptcy requires, and it is also something used for many other purposes. For example, an estate sale uses liquidation to sell everything to raise some cash.

Why It Is Required

Liquidation helps the creditors in bankruptcy cases, which is why bankruptcy cases require it. When a person files Chapter 7, the court must evaluate the case before approving it. If approved, the person receives forgiveness of all qualifying debts. If the person owed $50,000 in credit card bills, the bankruptcy case would wipe the balance to zero. The case would forgive the $50,000 of debt, and the creditors would receive nothing.

If the person filing has qualifying assets, the court can take them from the person and sell them. All the money raised from selling these things goes directly to the creditors. While the creditors might not receive all the money the person owes them, they will receive some. Therefore, liquidation aims to provide creditors with some of the money they are entitled to receive.

How It Works

When you file for bankruptcy, you might lose some of the things you own, but you will not lose everything. Your lawyer will divide them into two categories. The first category is exempt assets. These are things the court cannot touch in your case. The other category is non-exempt assets. When assets fall into this category, the court can take them from you. Courts will only take assets of value, though. They need to make a profit on selling the items, so they will look for assets that have equity in them.

Liquidation is a normal part of a Chapter 7 bankruptcy case, but it does not necessarily mean you will lose assets. Your lawyer can help you determine what you stand to lose by filing Chapter 7 before you file the documents. To find out more about this and other parts of a Chapter 7 case, contact a bankruptcy law firm today.

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