What is Chapter 7 – Bankruptcy Liquidation?

Chapter 7 of the Bankruptcy Code is generally known as a liquidation proceeding. For individuals, the concept is rather straightforward; in exchange for liquidating all of a debtor’s non-exempt assets, the debtor gets a discharge of all dischargeable debts.

Because California has very liberal (some would say too generous) exemption statutes, over 95% of individual debtors filing Chapter 7 get to keep all of their assets and get a discharge of their dischargeable debts. As stated above, a debtor who files Chapter 7 gets to keep “exempt assets” and must surrender “non-exempt assets.” The exemption statutes in California are very extensive. Some assets are protected in full and other assets are protected up to a dollar amount. For example, certain retirement accounts are fully exempt. On the other hand, equity in a residence is exempt either in the amount of $75,000, $100,000, or $175,000, depending on several factors.

Already, “dischargeable debts” have been referenced several times. In Chapter 7, most debts of are dischargeable, but some are not. The list of non-dischargeable debts can be found in Section 523 of the Bankruptcy Code. Debts that are non-dischargeable include certain types of tax debts, certain types of domestic support obligations, certain debts incurred through fraud or willful malicious behavior, and certain debts that arise from breach of fiduciary duty.

A debtor can also be denied a discharge of all debts for several reasons. The two most common reasons for a denial of discharge are (1) if a debtor makes a false oath, such as not disclosing an asset or a transfer, or (2) if a debtor transfers assets with intent to hinder, delay, or defraud creditors. These are common grounds for denial of discharge, but there are other grounds for denial.

One of the most important jobs of a bankruptcy attorney is to ethically and legally maximize a debtor’s right to claim exemptions. Another important job is to assess the facts and advise the client as to what debts are dischargeable.

Chapter 7 bankruptcy proceedings are complex, and a potential debtor should only retain counsel who has demonstrated expertise in the area.

The above discussion is primarily directed to individuals filing Chapter 7. Business entities are certainly permitted to file Chapter 7, but there are few major differences. One, business entities do not get discharges of their debts under Chapter 7. Two, business entities do not get to exempt any assets.

It is a frequent debate whether it makes any sense for business entity to file Chapter 7 seeing as they do not get discharges. There are pros and cons of filing Chapter 7 and there is no one right answer. It is always determined by the specific facts of each case.

Filing a Chapter 7 generally requires significant planning before filing the petition. Anyone considering filing a Chapter 7 petition should consult with an attorney long before there any significant deadlines.