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Implications of Chapter 7 liquidation

| Jun 2, 2020 | Chapter 7 |

Consumers may have doubts or fears about filing for bankruptcy even in the face of rapidly mounting debt. There may be particular concern about losing all their property and having to start over with nothing.

Taking all of a consumer’s property is not the goal of bankruptcy. However, there is a possibility that the filer may lose some property if he or she files Chapter 7. Also called liquidation bankruptcy, Chapter 7 theoretically requires the sale of some of the consumer’s assets in order to make payments to creditors and discharge most debts. In practice, not everyone who files Chapter 7 ends up having property liquidated.

Exempt assets

The goal of Chapter 7 bankruptcy is to allow the filer to make a fresh financial start. This is easier if the filer retains at least some of his or her assets. Therefore, under Chapter 7, exemptions apply to certain types of property and assets. According to Experian, there are baseline federal exemptions. For example, under the homestead exemption, equity in one’s home is exempt up to approximately $25,000. Some states apply their own exemptions that are more generous than what federal regulations allow.

No-asset cases

No-asset cases occur when all or most of the debtor’s property is exempt under federal and/or state regulations and/or when valid liens apply. No liquidation takes place in a no-asset bankruptcy, meaning that there is no sale of any property and no distribution to creditors before debt discharge takes place. According to United States Courts, no-asset cases make up the majority of Chapter 7 filings involving individuals rather than businesses.

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