Most of the time, those who go bankrupt are able to start anew with a clean financial slate by having their debts wiped out through a discharge or a reorganization. Usually, a discharge entails the liquidation of a debtor’s asset wherein the proceeds will be used to pay off the creditors. On the other hand, debt reorganization is more likely to happen when a debtor has enough current monthly income to pay off their debts.
What is liquidation?
In bankruptcy, liquidation is the process of raising up enough cash money to help debtors pay off their debts to creditors. Assets and properties tagged as non-exempt are the only properties that can be liquidated.
Exemptions to bankruptcy liquidations
There are cases when a debtor has a “no-asset case”. This only means that the debtor involved has no asset or property available for liquidation or that they happen to exempt all their properties that should have been liquidated. This often happens when the bankruptcy court exempts properties that a debtor cannot live without or cannot start over with without it such as a house or a car. When this case happens, the bankruptcy process continues without any asset liquidated. What happens then is that debts eligible for discharge are discharged and debtors are no longer held liable for their debts.
Types of liquidation
Unknown to most debtors, there are two types of liquidation that can be applied to the bankruptcy process: compulsory liquidation and voluntary liquidation.
The difference between the two can be easily distinguished because in the first one – which is compulsory liquidation – it is the creditors who issue a formal petition to the court to force the debtor to liquidate his/her assets. On the other hand, voluntary liquidation happens when the debtor makes a voluntary declaration that they are already insolvent and can only pay through auctioning or selling off their assets and using the proceeds to pay off their creditors.
The bankruptcy trustee and asset liquidation
In the case of bankruptcy, it is not the debtors who do the liquidation of the assets. The liquidation of nonexempt properties and assets can only be done by the bankruptcy trustee appointed to the bankruptcy as well as the actual distribution of the proceeds to the unsecured creditors.
Debtors should take note that the bankruptcy trustee also reviews the nature and urgency of each debt so debts that need paying the most like child or spousal support are paid first before others.
“No asset” bankruptcy
When a bankruptcy case falls under the “no asset” category, such a report will be filed in court by the bankruptcy trustee and no proceeds will be distributed to the unsecured creditors. Most of the bankruptcy cases filed under Chapter 7 fall under this category so creditors have no need to file proofs of claims since there be no distribution anyway.
Also, federal and state exemptions which vary from state to state allow a debtor to protect most of their property so they lose very little or no property at all when filing for a Chapter 7 bankruptcy. Since each bankruptcy case is unique for each person, a bankruptcy attorney would be a vital source of information and other important details relating to bankruptcy.