Chapter 7 bankruptcy is known as the “liquidation” bankruptcy process. There are other processes under other chapters of the United States Bankruptcy Code, however. Statistics show that debtors file Chapter 7 bankruptcy petitions more frequently than petitions under any other chapter. This is likely due to the discharge of many assets available to individual debtors at the end of the proceeding, rather than a reorganization or payment plan that results from other chapters.
Chapter 7 Liquidation of Nonexempt Assets
Liquidation in bankruptcy is the sale of nonexempt assets. Nonexempt assets are generally basic necessities and other small amounts of non-extravagant property or possessions which are not taken from a debtor in a Chapter 7 bankruptcy proceeding. In other words, they are exempt from the reach of the trustee, and ultimately the creditors.
After liquidation of the nonexempt assets, if there are any, the trustee is charged with using the proceeds from the liquidation to pay off creditors, as explained below. The trustee has many other duties as well.
The United States Trustee and the Chapter 7 Trustee
In Chapter 7 cases, the United States Trustee litigates issues that affect the integrity of the bankruptcy system. For example, the United States Trustee might:
- Argue that granting the debtor a bankruptcy discharge would constitute a “substantial abuse” of the bankruptcy process.
- Object to excessive fees requested by the debtor’s attorney.
- Take action against unlawful practices by bankruptcy petition preparers–generally, non-lawyers who receive a fee to prepare a consumer debtor’s bankruptcy papers.
The United States Trustee also appoints and supervises the Chapter 7 trustees who administer consumer debtors’ bankruptcy estates.
Liquidation and Discharge
In most Chapter 7 cases, no assets are available for distribution to creditors. However, if a Chapter 7 debtor has property that is not exempt from creditors’ reach under state or federal law, the trustee may sell that property and distribute the money to creditors. This is what has been referred to above as “liquidation.”
After the liquidation and repayment to creditors, any dischargeable debts are wiped out and creditors are no longer permitted under the law to seek repayment from the debtor for those debts.
Chapter 7 Trustee Appointment
The United States Trustee appoints each Chapter 7 trustee to a panel for up to one year, renewable at the United States Trustee’s discretion; these “panel trustees” are then assigned to Chapter 7 cases on a blind rotation basis. The United States Trustee supervises the panel trustees’ administration of individual debtor estates; monitors the trustees’ financial record-keeping; and imposes other requirements to ensure that the trustees carry out their fiduciary duties.