Chapter 7 bankruptcy offers a unique way for consumers to settle their debts with creditors. Paying creditors under Chapter 7 bankruptcy usually involves liquidation, which allows a trustee to sell some property to meet the filer's debts.
However, many forms of property are exempt from liquidation in Chapter 7. As a result, many filers may see their debts discharged while losing only a small amount of property, if any.
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In a Chapter 7 bankruptcy case, creditors are not always repaid. In fact, if filers have a substantial amount of property exempt from liquidation, their debts may be discharged with little money repaid to the creditors, if at all.
In many cases, though, some liquidation occurs. This is the process through which creditors are repaid under Chapter 7 bankruptcy.
Through liquidation, the bankruptcy court sells some of the filer's non-exempt property and uses the proceeds to pay back some of the filer's debts. Items of property that may be exempt from a liquidation sale include:
These property exemptions vary widely by state. As a result, many filers choose to work with a local attorney familiar with their state bankruptcy laws. Some filers may be able to avoid repaying creditors in Chapter 7 bankruptcy, while others may have to pay some money back through the liquidation process.
Of course, even if some of a filer's property is liquidated, when a debt is discharged in Chapter 7, it is usually discharged forever. In many filers' eyes, this debt relief may be worth the loss of some property.
If your goal is to repay creditors, rather than simply have your debts discharged, then Chapter 13 bankruptcy may be a better fit. In Chapter 13, filers create a reorganized debt plan that allows them to make payments over a few years.
This lets filers settle their debts without having to sell or lose property. In order to qualify for Chapter 13, however, filers must have a relatively steady source of income in order to make monthly debt payments.