What Happens in a Chapter 7 Asset Case?

The basis of every Chapter 7 case is a liquidation. The analysis involved looks at the assets listed by the debtor on the bankruptcy petition, along with any liens, encumbrances, or exemptions, to determine if there is any equity in property that would be worth liquidating for the benefit of the debtor's unsecured creditors. The appointed interim trustee also examines the debtor at the 341 Meeting of Creditors to both confirm the assets listed on the schedules and also see if there was anything else that was not listed. In the vast majority of cases, the trustee finds there to be no assets in the case and files a report of no distribution.

There are times, though, where the trustee either finds an asset or the debtor knew there was going to be one ahead of time. The asset can take many different forms, from a large tax refund to a paid in full vehicle. In these cases, the trustee will file an initial report of assets and begin discussions with the debtor's attorney to resolve the issue. Many times, the trustee will allow the debtor to "buy out" their interest by making either a lump sum or monthly installments, instead of outright taking the asset and selling it.

The procedure for this necessarily lengthens the bankruptcy case. In many ways, it is similar to the process of a Chapter 13 bankruptcy. The trustee, after filing an initial report of assets, will file a notice fixing a time for filing claims. This requires creditors to file a proof of claim (essentially establishing their right to the debt) by a certain time. Then, the trustee, after the time period had passed, would distribute the asset to creditors according to their priority and the size of the asset. Only then, after all that is completed, will the bankruptcy be over.

Obviously, this is a difficult and sometimes confusing process. The best solution is to consult with your bankruptcy attorney ahead of time to forecast if there will be any asset issues in your case. This way, you can try to file the bankruptcy to avoid an asset filing, or you will be aware of the process ahead of time.

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