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How Does a Chapter 7 Liquidation Work?

Some people are anxious when you mention Chapter 7 liquidation or Chapter 7 bankruptcy because they have heard horror stories about debtors losing everything when they file for bankruptcy relief. However, these stories do not represent a typical Chapter 7 bankruptcy case. Filing for debt relief under Chapter 7 is often a positive and beneficial experience for debtors.

To learn more about Chapter 7 liquidation, you can continue reading this article and call 904-248-4482 to schedule a free consultation with a Jacksonville bankruptcy attorney. The attorneys of The Law Offices of Justin McMurray, P.A. answer your questions and provide trusted legal advice regarding debt relief in Florida.

Highlights from this article include:

  • Why Is A Chapter 7 Case Referred To As A Liquidation Bankruptcy?
  • Does Filing a Chapter 7 Case Mean I Will Lose Property?
  • What Does A Chapter 7 Trustee Do?
  • What Is The Typical Process For A Chapter 7 Bankruptcy?

Why Is A Chapter 7 Case Referred To As A Liquidation Bankruptcy?

The term “liquidation” refers to the authority a Chapter 7 trustee may be granted to sell certain assets to pay unsecured debts. It also applies to a business Chapter 7 because the business is closed, and the business assets are liquidated to pay creditors. However, most of the Chapter 7 cases filed by individuals and couples in Florida do not result in property loss. Many of the cases are no-asset Chapter 7 cases, meaning the debtors keep all their property.

Before filing a Chapter 7 bankruptcy case, it is crucial that you speak with a Jacksonville bankruptcy attorney. An attorney experienced in bankruptcy law can review your situation to determine if Chapter 7 is the best choice for you to get rid of debt and to protect your property.

Does Filing a Chapter 7 Case Mean I Will Lose Property?

Florida has chosen to opt out of the federal bankruptcy exemptions. Instead, state law requires that debtor's use state bankruptcy exemptions when filing for bankruptcy relief. A bankruptcy exemption protects the equity in certain types of property so that the property cannot be used to pay debts.

For instance, Florida allows a debtor to protect up to $1,000 in equity in a motor vehicle. In addition, if you do not use the homestead exemption, you can also apply up to $4,000 as a wildcard exemption to your motor vehicle.

When you file a Chapter 7 bankruptcy case, you must “claim” the bankruptcy exemptions that apply in your case. Claiming an exemption simply means that you include the exemption in your bankruptcy forms to notify the court and creditors that you are alleging certain property is exempt from being used to repay debts.

However, failing to claim the correct exemptions could result in property being seized by the Chapter 7 trustee and sold. Your Jacksonville bankruptcy attorney carefully analyzes your property to determine which exemptions to use in your case.

What Does A Chapter 7 Trustee Do?

A Chapter 7 trustee is appointed to administer the bankruptcy estate. The Chapter 7 trustee has several duties, including evaluating property to determine if the property may be sold to repay unsecured creditors.

The trustee carefully reviews each bankruptcy exemption claimed by the debtor and compares the exemption to the value of the property being protected. If the equity in the property greatly exceeds the exemption, the Chapter 7 trustee may take the property and sell it. However, it must be worthwhile for the trustee to sell the property. Therefore, a small amount of equity in one piece of property may not be worth the trustee's time and expense to sell the item.

Depending on the situation, a debtor may “buy back” an asset from the Chapter 7 trustee. Instead of the trustee selling the item to a third party, the trustee allows the debtor to pay the trustee an amount equal to the net equity in an item. The net equity is equal to the fair market value of the item less any liens and exemptions claimed for the item. If the item is sold to a third party, the trustee must pay the debtor an amount equal to the claim exemption for the property before distributing the net sale proceeds to unsecured creditors.

Each Chapter 7 trustee has a system for evaluating cases. An experienced Jacksonville bankruptcy attorney works with local trustees and understands how they view cases. While an attorney cannot give you any guarantees regarding how a trustee may act, an experienced, local bankruptcy attorney in Jacksonville can provide opinions on how a trustee may act based on handling cases with a specific trustee in the past.

What Is The Typical Process For A Chapter 7 Bankruptcy?

Each bankruptcy case is unique. Your Chapter 7 case may not proceed along the same timeline and process as another Chapter 7 case. However, there are some steps in a Chapter 7 case that are common and expected by attorneys.

The steps in a typical no-asset bankruptcy case under Chapter 7 include:

  • Meeting with a Jacksonville bankruptcy attorney to evaluate your debt relief options.
  • Hiring an attorney and working with that attorney to prepare bankruptcy forms for filing.
  • Completion of the Creditor Counseling Course.
  • Filing of the Chapter 7 bankruptcy petition, schedules, and statements.
  • Attend the Section 341 First Meeting of Creditors, which is typically the only bankruptcy hearing for most debtors.
  • Complete the Debtor Education Course, if not already completed.
  • Obtain a bankruptcy discharge and order closing bankruptcy case.

A typical no-asset Chapter 7 case can be completed within four to six months after the bankruptcy petition is filed. However, if the trustee discovers an asset that has non-exempt equity, the trustee may choose to sell the asset. This process could add several months to the timeline, but the debtor should not need to do anything while the Chapter 7 trustee goes through the court process of selling an asset, paying creditors, and closing the case.

Contact a Jacksonville Bankruptcy Attorney for More Information

Contact The Law Offices of Justin McMurray, P.A. by calling 904-248-4482 or using the contact form above to request a free consultation with our Jacksonville bankruptcy lawyer.

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