CHAPTER 7 NUTS & BOLTS
Chapter 7 bankruptcy is often called “liquidation” or “straight” bankruptcy. When most people think of bankruptcy, Chapter 7 is what they have in mind: it’s the one where the court (in theory) sells your property and uses that money to pay your creditors. In reality, most people never have to sell off any of their property because of what are called “exemptions.” Exempt property is property you get to keep because it is not subject to (that is, it is exempt from) the rules that say you have to liquidate. Hiring a bankruptcy lawyer is a good way to learn which property is exempt and which isn’t, and to make sure all of your paperwork correctly identifies all of your exempt property.
Not only will a good lawyer make sure you get all your exemptions down on paper, but he (or she) will help you with “full disclosure,” which is the most important thing you need to understand about bankruptcy. You have to provide the court with a full disclosure of all your property, all your debt, all your income, and all your expenses. That’s part of the deal: on the one hand, you disclose your full financial situation, but on the other hand, you get relief from your creditors calling and harassing and garnishing your wages (this is called the “automatic stay”), and you get most, if not all, of your debts wiped out (this is called “discharge”) at the end of the process.
Almost all of the property you disclose will become part of something called the “bankruptcy estate.” The estate is the big picture the court looks at to determine which rules apply (for example, exemption rules) to each piece of property and how each creditor will be treated. Not all property goes into the estate, though, and that’s another reason why it’s good to have a lawyer work with you—to help you figure out what goes in and what stays out.
In order to make sure you are putting all the right property into the estate and that you are exempting only property that is allowed to be exempted, the court appoints someone called a “trustee” to review your disclosures. The trustee’s job is to look after the interests of your creditors by selling any of your estate property that isn’t exempt and distributing the money from that sale to the creditors. That almost never happens, but the trustee has to check and make sure everything goes according to the rules.
The trustee is also in charge of something called “the meeting of the creditors.”
Those are the two basic ways you get to keep your property in a liquidation bankruptcy—first, make sure that property that doesn’t belong in the estate stays out so the court never even thinks about selling it off, and second, make sure that all of the property inside the estate that can be exempted is.