In the bankruptcy system, there are two basic ways to address a debtor's situation. These are restructuring and liquidation. Restructuring means that the creditors may have to accept a smaller amount of what's owed to them, but they'll largely get paid as long as the debtor follows the plan.
Liquidation is a more aggressive process that oftentimes leads to much of what the debtor owns being sold. Here's how that idea fits into chapter 7 bankruptcy law.
What's Being Sold?
Typically, the court will order that all non-essential assets will be sold. In other words, you'll likely have to sell anything that seems excessive, such as a second home or a less-than-practical car.
Exemptions
The court does allow debtors to hold onto essential and practical items, but there is a reasonableness standard applied. For example, you can't hold onto a $250,000 sports car simply because it's the only one you have. Conversely, a practical commuting or work vehicle would likely be exempt from sale.
Debtors can usually claim exemptions for a number of everyday items. These include things like cooking wares, some clothing, and practical furnishings.
You must apply for an exemption for every item, and your creditors and the court have the right to object to any claimed exemptions. For example, an objection would probably be raised if you tried to keep a $20,000 fur coat because there are more practical solutions.
Non-Exempt Items
Generally, all accounts will be immediately liquidated, with the exception of some types of protected retirement accounts. If you own stocks in a regular brokerage account, for example, those will be sold and the proceeds will be put toward paying off your debts.
Anything that's considered a form of secured credit on an unpaid loan is not exempt, too. For example, the bank has the right to repo your car.
How Is Liquidation Conducted?
The judge assigned to the case will ask the bankruptcy court system to send a randomly selected trustee. Usually, this person is an account, a fiduciary, or a lawyer with training in chapter 7 bankruptcy law.
A trustee's duty is to the creditors. Their goal is to make as much money from the sale of your stuff as possible. Any money from those sales will be distributed to your creditors. Once the sales are completed, the trustee will notify the court. The judge will then finalize the case and dismiss any remaining debts.
For more information on chapter 7 bankruptcy law, contact a legal professional.
Share4 May 2020
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