Bankruptcy Information Center

Liquidation Bankruptcy / Chapter 7

The primary purpose of the Chapter 7 filing is to discharge all debts through the liquidation of assets. However, Chapter 7 bankruptcy does not discharge all debts. For example, child support and alimony are not discharged. Most tax debt and student loans are also not affected by the Chapter 7 filing. There is also a presumption of fraud in regard to some credit card debt that would ordinarily be discharged. This would include last minute purchases and charges before filing for bankruptcy. Debts incurred by fraud are not dischargeable.

Chapter 7 bankruptcies involve the complete liquidation of all company assets. It is more often the case that the company has such a profound load of debt that there is no other alternative than liquidation. When there has been a Chapter 7 filing there is an automatic stay on all collection efforts of most creditors. All operations of the company are put to a halt and there is the appointment of a trustee by the Federal District Court. The trustee will be responsible for the sale of the company assets and disbursement to creditors.

All pertinent financial information in a Chapter 7 filing must be recorded on a form called the Statement of Financial Affairs. This form is used by the trustee to determine how best to go forward with liquidation and repayment. What is to be listed on the Statement of Financial Affairs is very detailed. It includes both liabilities and assets. Listed within the liabilities are priority debts (child support, taxes), secured, and unsecured creditors. The assets section lists all assets, including but not limited to real property, tangible and intangible property. Wages, retirement funds, cash, bank accounts, and personal possessions are to be disclosed on the Statement of Financial Affairs.

When filing under Chapter 7 all income and expenses, assets, debts and property transactions must be disclosed. The period of time affected by this disclosure is the two years prior to filing for bankruptcy. The trustee at a "meeting of creditors" will review all of this information. Creditors are permitted to attend the meeting. This meeting will review all exempt and nonexempt property disclosures. The trustee will evaluate the accuracy of the disclosure and determine if property is, in fact, exempt or not.

Federal and state law defines what is exempt from liquidation. State law must conform to federal bankruptcy law, but may also provide an additional measure of protection. For example, some states allow for a homestead exemption, which will save a debtor's home from liquidation. However, there may be value ceilings connected with the homestead exemption. Other state exemptions may include personal possessions including, but not limited to, jewelry, clothes, and automobiles. After exempted assets have been accounted for, the trustee then sells off all non-exempt assets to begin settling debts. Bankruptcy lawyers are an excellent resource for this information.