In Bankruptcy, What Does Liquidation Mean?

Filing for bankruptcy is not a one-size-fits-all proposition. Though bankruptcy always means that the person or entity that is filing is unable to pay their debts, some people are able to ask the courts to help them by modifying what they owe rather than entirely eliminating dischargeable debt. These bankruptcies are filed under Chapter 13, and the debtors are able to extend the terms of their loan, have their interest rates reduced, or in some cases have the amount of their debt reduced. By contrast, a Chapter 7 bankruptcy filing is reserved for those who are so deeply in debt that this type of reorganization or modification will not help. Their dischargeable debts are entirely forgiven by the bankruptcy court, but this can come at a price: there is a chance that they will have to relinquish their personal property in a process known as liquidation.

The process of filing for bankruptcy begins with filling out an extensive set of forms that document financial status. It is a reflection of what the debtor earns, what they own, and what they owe. Though property does not get liquidated in every Chapter 7 bankruptcy, and many assets may be protected through a process known as exemption, the risk of losing personal assets to liquidation is usually the thing that those considering a bankruptcy filing fear the most.

Every state has its own rules regarding what can be kept, or exempted, from the liquidation process and what assets are vulnerable and available to liquidation. There are also federal bankruptcy exemption laws. An experienced bankruptcy attorney will be able to guide you through deciding which exemption law you wish to use in your filing in order to give your belongings the most robust protection. If you do not own any assets that can be sold, or if your property is protected by exemptions, then your case will be considered a “no-asset bankruptcy.” Where assets are available for liquidation, creditors are notified so that they can file a proof of claim. After assets are sold or liquidated, the proceeds will be distributed to those to whom the debtor owes money based on their priority.

Filing for bankruptcy — even a Chapter 7 bankruptcy — does not automatically mean that you are going to lose the things that are important to you. Your best approach is to work with a knowledgeable bankruptcy attorney who can explain all your options. Contact us today to see how we can help.