Legal Corner: Exploring liquidation bankruptcy

Last week, the Legal Corner discussed the basics of bankruptcy and some of the benefits it may be able to provide to individuals and certain business entities. This week, let’s cover the Chapter 7 bankruptcy process and some of the possible advantages and disadvantages to filing.

Generally there are two methods of bankruptcy — liquidation and repayment. Chapter 7 bankruptcy involves the liquidation process. The liquidation method requires a trustee to evaluate and then sale the debtor’s property. Once all available property is sold, the trustee will then distribute the proceeds from the sale to the creditors in accordance with the provisions of the Bankruptcy Code.

The trustee is the individual in charge of managing a bankruptcy estate. The debtor in the bankruptcy process is the individual, partnership, corporation or business entity that filed the petition for bankruptcy and the owner of the estate. The creditor is the person or company to whom the debtor owes the money.

During the initial property evaluation process, the trustee will first determine what property is exempt from the liquidation process, based on the bankruptcy laws. Once the trustee has identified the exempt property, he or she will value and sell the remaining property. However, if all of the debtor’s property is exempt from liquidation, the trustee will prepare a report stating that there will not be any proceeds to distribute to the creditors.

In order to be able to file for Chapter 7 bankruptcy, the debtor must first receive credit counseling from an approved credit counseling agency at least 180 days prior to filing. However, a debtor will sometimes not be allowed to file a petition for Chapter 7 bankruptcy if one of the following has occurred.

If the debtor has filed a bankruptcy petition within the last 180 days, and the petition was dismissed or terminated by the court, because the debtor failed to appear in nankruptcy court or failed to comply with the bankruptcy court orders. Additionally, under certain circumstances a debtor will not be allowed to file a Chapter 7 bankruptcy petition if the debtor voluntarily dismissed a previous petition.

One of the major advantages to filing Chapter 7 bankruptcy includes the debtor being discharged or released from certain debt, and ultimately having an opportunity to financially start over. Essentially under a bankruptcy, once a debt has been discharged or released, the debtor is no longer obligated to pay that creditor.

More importantly, once the debtor has filed the Chapter 7 petition, most of the collection actions against the debtor or the debtor’s property is “automatically stayed” or stopped. For example, if the debtor has received notice of a possible foreclosure on their property.

One of the major disadvantages to filing Chapter 7 bankruptcy include the debtor possibly losing property during the liquidation process. Moreover, a Chapter 7 bankruptcy will not necessarily discharge all of the debtors’ debt, because there are certain types of debt that cannot be discharged under the Bankruptcy Code.

Additionally, a Chapter 7 bankruptcy can remain on your credit report for up to 10 years, so it could have a negative effect on the debtor’s ability to obtain additional credit or a mortgage.

If you have additional questions about the Chapter 7 bankruptcy process and some of the options it may be able to provide, please consult an attorney. Next week, the Legal Corner will discuss in more detail the Chapter 13 bankruptcy process. As always, be informed. Be prepared.