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Why Chapter 7 Is Called the "Liquidation" Form of Bankruptcy

Door closed:Bankruptcy concept
Filing for bankruptcy is an option you have when you cannot find a way out of your debt problems. To file for bankruptcy, you will need to hire a bankruptcy attorney, and they will help you decide which branch to file under. If the lawyer thinks Chapter 7 is the best option, they will explain what this branch is and why it is called the liquidation form of bankruptcy.
The Two Main Principles of Chapter 7 Bankruptcy
People often refer to Chapter 7 as the liquidation form of bankruptcy because of the two key principles this branch uses to help people:
  1. Chapter 7 offers a discharge of qualifying debts – When the court discharges debts, it means they forgive the debts. They wipe out the debts completely, and the person will never have to repay them.
  2. Chapter 7 requires forfeiting assets – Because a person must surrender certain assets, lawyers call this branch the liquidation branch of bankruptcy. The purpose of surrendering assets is to compensate the creditors after the court discharges debts owed to them.
In other words, if you qualify for Chapter 7, the benefit you receive is a discharge of debts, meaning you will no longer owe them. The consequence you face is the court telling you to give up things you own.
The Debts Chapter 7 Typically Discharges
In Chapter 7, the courts view debts in different ways, and they typically categorize debts as qualifying debts or non-qualifying debts. Debts that typically qualify for a discharge in Chapter 7 include:
  • Credit card bills
  • Personal or unsecured loans
  • Medical bills
  • Utility bills
  • Bad checks
  • Deficiencies from repossessions or foreclosures
  • Auto accident claims
Certain debts, such as IRS tax debts, might also qualify for a discharge. You should show your lawyer a copy of every debt you have to determine which would qualify for a discharge if you filed for bankruptcy.
The Assets You May Lose If You File for Chapter 7
The consequence of receiving a discharge is the potential to lose assets you own, but you should know that you will not lose everything you own. When the court determines which assets you must surrender, they do so by categorizing your assets by exempt assets and non-exempt assets.
Assets considered non-exempt are assets you can keep if you file for bankruptcy. Non-exempt assets typically include clothing, personal belongings, jewelry, pensions, and vehicles. Before the court classifies these items as non-exempt, they may look at the values of the assets and the amount you owe on them.
Assets considered exempt are assets that a person must typically surrender when filing for Chapter 7. Exempt assets often include cash, investments, second vehicles, vacation homes, and collections of items worth a lot of money. Additionally, a person must typically give up their tax return check the year after filing for bankruptcy.
The purpose of surrendering assets is to allow the court to sell them to raise money to pay off some of the debts discharged in your case.
How a Lawyer Determines How Chapter 7 Would Affect You
Every bankruptcy case is unique and different, and this is because every person who files has a unique situation. If you want to know the effects filing for Chapter 7 would have on your finances, assets, and debts, you would need to visit a lawyer.
A bankruptcy lawyer can review all your assets and debts to give you a good idea as to the effects bankruptcy would have on your financial state.
Bankruptcy is not always the best solution for people with debt problems, but it is one option you have. If you would like to learn how bankruptcy could help you, contact Affiliated Legal Services, Inc. We can evaluate your situation and offer expert legal advice to help you learn all your options. 


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