Chapter 7 - Liquidation

A Chapter 7 liquidation case is the type of bankruptcy someone normally thinks of when they hear the word bankruptcy.  Once a debtor has filed his case a trustee is appointed and takes charge of the debtors assets or the bankruptcy estate.  The job of the trustee is to liquidate or sell those assets and pay to the creditors their pro rata share of the proceeds of sale, less administrative and sale costs.   For example Joe files bankruptcy and the only thing he owns is a house that is worth $50,000.00.  Joe also owes $400,000.00 in various debts.  The trustee would sell the house, and pay the costs of sale, say $10,000.00, leaving $40,000.00  available to distribute to the creditors.  In that case each creditor would get 10% of their claim and the court would enter an order discharging Joe of the obligation to pay any balance.

However, the trustee does not get to administer and sell all the assets Joe might own, because the law allows you to "exempt" certain property.  For example under Virginia exemptions, Joe could have "exempted" up to $5,000.00 of the value of the house,  on his "homestead exemption".  In Virginia the main exemptions are the $5,000.00 homestead exemption, $6,000.00 wort of car equity, retirement funds and others.

In a chapter 7 bankruptcy, the debtor receivers an "order of discharge" where the bankruptcy court orders that the debtor is no longer is responsible for paying his or her debts and that no one can take any action to try to collect debts owed prior to the bankruptcy.  There are exceptions to the discharge however, for example if you owe child support or alimony, those debts would be "non-dischargeable".  Many other debts are non-dischargeable, but non-dischargeability is the exception and is not found in the vast majority of cases.  You must remember that filing bankruptcy is an important and serious step, particularity since you may only received a bankruptcy discharge once every 8 years no matter what later hardship you might experience.