Chapter 7 bankruptcy is known as liquidation, or “fresh start” bankruptcy. In a Chapter 7 case, a trustee (assigned by the U.S. Trustee’s Office or chosen by the debtor’s creditors) may liquidate, or sell, the debtor’s non-exempt assets to pay all or a portion of the debts owed to creditors. As a practical matter, you, as a debtor, typically can protect all of your assets by using state or federal exemptions. Many Chapter 7 trustees find that more than 80 percent of their cases are resolved as “no asset” cases, meaning that all assets are exempt or encumbered with liens.

State law, and in some states federal law, protects you from having certain property taken. This property is “exempt” from liquidation during bankruptcy, and may include, for example, a certain amount of equity in a home, a vehicle, furniture, clothes, certain retirement accounts, life insurance policies, etc.
  
When estimating the amount of money that can be made from selling a particular non-exempt item in a Chapter 7 liquidation bankruptcy, a bankruptcy trustee typically will subtract your exemption from your property’s “fair market value” (what a ready, willing and able buyer will pay for the property in “as is” condition). The trustee also will subtract whatever you may owe for any liens or mortgages that may be on your property. 

The trustee will only liquidate assets that will net cash to pay your creditors. The trustee also must deduct the fees and expenses paid to any professionals (such as Realtors or auctioneers) assisting in the liquidation of your property. Through this liquidation process, any debts the trustee does not pay (with certain exceptions) will be discharged (eliminated), and creditors will not be able to force you to pay any remaining amount owed.

© Ohio State Bar Association, February 2012

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