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Bankruptcy: Chapter 7 Liquidation Law Explained

By Edited Oct 7, 2016 0 0

Bankruptcy law of Chapter 7 provides an "order of relief" that issues an automatic stay for the debtor. Therefore, all creditors and collectors are forbidden to pursue the debtor's property outside bankruptcy proceedings.

Filing chapter 7 bankruptcy is more important if the debtor has received a foreclosure notice on their property. However, it can be related to chapter 13 of bankruptcy laws since the debtors can undergo financial reorganization. This means that the debtor can follow a plan set by the federal court and pay off all creditors in a specific time frame. Chapter 7 allows the debtor to repay and get out of debt immediately.

Furthermore, chapter 7 bankruptcy is classified as "straight bankruptcy" or "liquidation bankruptcy," because the trustee who is appointed by the court will gather and sell all the nonexempt assets. Then he/she later distributes all the proceeds to the creditors accordingly. Some debtors are permitted to retain some of their exempt property. But the exempt property is liquidated or sold by the court-appointed trustee.

Filing for chapter 7 bankruptcy means that all the debtors' property will be sold to pay off all the creditors. This may be an advantage, but mostly it is a disadvantage depending on how much equity is owed to the creditors and the value of the property. Debtors can only claim a part of an exempt property under the State's Federal Bankruptcy law. This varies from state to state, so the attorney will explain in detail how to assess claiming exempt assets.

Chapter 7 bankruptcy laws are most frequently used by businesses and individuals who are unable to make repayments of financial credit gained. Filing for bankruptcy chapter 7 involves complete liquidation of a debtors' property to pay the creditors and foreclose all the outstanding debts stacked against the debtor. This enables a debtor to a "fresh start."

Chapter 7 Bankruptcy for Businesses

When a business is badly in debt and unable to repay creditors, it may willingly file for bankruptcy. In more uncommon cases, the business will be forced to file for chapter 7 bankruptcies by its creditors. After filing for chapter 7 bankruptcy, the business will cease all its operations, unless it is allowed to operate with permission from a court-appointed trustee.

The trustee immediately examines the business' financial affairs, and puts up the debtor's assets or property for liquidation and the proceedings are used to pay off debtors. This does not mean that a business will allow employees to lose their jobs. For example, when a very large company files for bankruptcy, the entire division is sold to other companies during liquidation. The business will continue to operate, but under the management of the buying company.

Creditors such as bondholders and mortgage lenders are secured. They have a legal right to secure collateral on their loans, and this right is not defeated by bankruptcy. A creditor is fully reimbursed when the value of the collateral of a loan issued to the debtor is equal or exceeds the amount of debt owed. Although creditors are not entitled to gain any distribution of the debtor's liquidated property.

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