Liquidation in Chapter 7 Bankruptcy
The term “liquidation” often frightens people considering chapter 7 bankruptcy. However, as this page will discuss, the majority of chapter 7 bankruptcy cases are “no asset” cases in which no property is actually sold. Therefore, while a central feature of chapter 7 bankruptcy is the liquidation of nonexempt assets, in practice, the application of state exemption law largely protects debtor assets from chapter 7 liquidation. Contact our chapter 7 bankruptcy attorney to learn more about protecting your assets in bankruptcy.
The Nature of Liquidation In Chapter 7 Bankruptcy
Unlike chapter 13 bankruptcy in which the debtor is allowed to retain property and reorganize debts in exchange for 3 to 5 years of payments, chapter 7 bankruptcy requires the debtor to liquidate nonexempt assets in exchange for the expeditious discharge of unsecured debts. The expeditious discharge is often preferred to making monthly payments for 3 to 5 years under a chapter 13 plan, and for debtors with few assets or little net worth, the advantages of chapter 7 bankruptcy often outweigh those of chapter 13 bankruptcy. After all, if the debtor has few assets or little net worth there is a decreased risk of losing property in chapter 7 liquidation, especially when considering that state exemption laws protect basic forms of property that many debtors are likely to have.
Chapter 7 overview: In return for subjecting their nonexempt assets to liquidation, the chapter 7 debtor receives a fresh start through the discharge of their unsecured debts.
Exemptions & No Asset Cases
As mentioned, chapter 7 bankruptcy involves the liquidation of nonexempt assets. Exempt assets are removed from liquidation and are retained by the debtor if not encumbered by a security interest and subject to repossession or foreclosure. Nonexempt assets are property that is not exempt under California exemption laws. In California, the debtor can select one of two sets of exemption schemes: the 704 homestead exemption scheme and the 703 wildcard exemption scheme. The two exemption schemes exempt different forms of property in different amounts, and the debtor has the choice of selecting the exemption scheme most advantageous to their situation.
After applying an exemption scheme the debtor may or may not have nonexempt assets remaining for liquidation. If all of the debtor’s property is exempt under an exemption scheme the debtor has what is called a “no asset” case. In a “no asset” case, no nonexempt property exists to be liquidated after application of an exemptions scheme. Currently, most chapter 7 bankruptcy cases are no asset cases. Therefore, while liquidation is a central feature of chapter 7 bankruptcy it is not an overly common occurrence in many chapter 7 bankruptcy cases.
Sacramento Law Group
331 J St #200
Sacramento, CA 95814