Chapter 7 bankruptcy is commonly known as the “liquidation bankruptcy” because a bankruptcy trustee can sell (liquidate) some of a debtor’s property to pay creditors. This may occur when the debtor has extra assets, such as a vacation home, an extra automobile they don’t need, or other assets that are more luxuries than necessities.
Sometimes when people hear the word “liquidation,” their first instinct is to second-guess their wedding rings, the coin collection they inherited from their grandfather, their grandmother’s pearl necklace that she gave them, and so on. Will such items be liquidated to pay off the person’s debts? Probably not.
Most Chapter 7s Are No Asset Bankruptcies
Contrary to popular belief, most people who file Chapter 7 do not turn over any of their personal property to the bankruptcy trustee. They don’t usually sell their designer handbags or jewelry they bought during brighter times, nor do they sell their computers, TVs, or other personal property to pay off creditors. Instead, most Chapter 7 filers have what are called “no-asset cases” and they keep everything they own.
In simple terms, when a debtor files a “no-asset case,” it sends a message to the creditors that there aren’t any assets to liquidate and therefore, they should not expect to be paid anything from the bankruptcy proceeds.
Not Everyone Qualifies for Chapter 7
It’s important to understand that not just anyone can file a Chapter 7 bankruptcy. For someone to file a Chapter 7, they have to qualify first and in order to qualify, they must pass the “means test.” If a debtor has a decent paying job and they have some disposable income every month, they may not qualify for a Chapter 7, and they may have to file a Chapter 13, “debt reorganization” bankruptcy instead. As a side note, Chapter 13 is also called the “wage earner’s bankruptcy.”
Exempt vs. Non-Exempt Assets
When someone files a Chapter 7, their assets become the property of the bankruptcy estate. A debtor’s right to keep their assets depends if the assets qualify as exempt. Each state has established bankruptcy exemptions, which protect certain assets in Chapter 7 up to a specific value. If an asset is exempt, the debtor can keep it. Some states say debtors have to use the state exemptions, or they give the option of using the federal exemptions instead.
Generally, if a debtor does end up having non-exempt assets (most debtors do not), the bankruptcy trustee will sell them and distribute the proceeds to creditors. If you have questions about Chapter 7 or the exemptions in Pennsylvania, contact our firm to meet with a York Chapter 7 lawyer for free.