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Understanding liquidation in Chapter 7 bankruptcy

If you are facing insurmountable debt and wondering how to get your life back on track, bankruptcy may seem like the last option you want to consider. Too many people assume that it will destroy their credit and doom their financial future when in fact the opposite is sometimes true. Chapter 7 bankruptcy, in particular, can provide debtors with a fresh start financially through liquidation.

This part of the process scares many people, though. When you hear the word liquidation, you might imagine losing your home and car, but liquidation can actually be a beneficial means of repaying debt and reclaiming your financial security. The following are a few things you should know about it.

Liquidating nonexempt property

The property that is eligible for liquidation under Chapter 7 is fairly specific. Nonexempt property is typically subject to liquidation, but it can be complex to determine what items are and are not exempt. Unnecessary luxuries are not exempt, but items that are necessities usually are. If you have a car, for example, it may qualify for exemption — but a second vehicle generally would not.

Giving proceeds to creditors

After determining the property subject to liquidation, you sell that property and transfer the proceeds to creditors. According to the United States Courts, a bankruptcy trustee who works to maximize the profits of the sale and pay off as much debt as possible handles this process. The resolution of your debts occurs after selling the nonexempt property and repaying creditors. 

Liquidating businesses

Individuals are not the only ones who can file for Chapter 7 and liquidate their assets. Businesses facing excessive debt might consider this option, too. Organizations looking to repay debt through liquidation will face a process similar to that which individuals go through. While liquidating assets, though, creditors may have the authorization to overtake operations of the company.

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