Liquidation bankruptcy, also referred to as “ordinary”, “straight,” or “Chapter 7” bankruptcy, is the most common form of bankruptcy for individuals.
“Liquidity” is a term often used in accounting to refer to how quickly assets (property that a person owns) can be turned into cash. Liquidation bankruptcy takes it name from this principle because it is designed to convert the debtor's property into cash, which is then used to repay creditors. In exchange, most or all of the liquidation bankruptcy filer's debts are discharged (wiped out).
(To learn more about liquidation bankruptcy, visit our Chapter 7 Bankruptcy area.)
The Role of the Trustee in Liquidation Bankruptcy
The liquifying of assets is performed by the bankruptcy trustee assigned to your case. The trustee will take all of your nonexempt assets, sell them, and then distribute the money to your unsecured creditors.
Most Debtors Lose Little Property if Any
Bankruptcy law prevents the trustee from seizing any property that is "exempt" by law. Because the federal bankruptcy exemptions and state exemptions often protect much of a debtor's property, many debtors lose little or no property in Chapter 7 bankruptcy. (To learn how exemptions work and what types of property are typically exempt, see the articles in our Bankruptcy Exemptions area.)
