Chapter 7

Nature and Purpose of Chapter 7
Most bankruptcy cases are filed under Chapter 7 (the so-called liquidation Chapter).  Chapter 7 embodies two separate (and often conflicting) ideals:

  • providing the debtor with a “fresh start” through a discharge of his or her debts; and
  • equitably distributing the debtor’s assets among competing creditors

Liquidation
Under Chapter 7, the debtor’s nonexempt assets are sold (liquidated) and the proceeds are paid to creditors.  In the majority of Chapter 7 cases, however, no dividends are actually paid to unsecured creditors because most debtor’s assets are fully encumbered, exempt or insufficient to pay anything other than a small fee to the Chapter 7 trustee.  These are commonly referred to as “no asset” cases.

Discharge and “fresh start”:
Individual Chapter 7 debtors obtain an extensive discharge of unsecured debts – alleviating creditor harassment and pressures associated with overwhelming debt; this is known as a “fresh start.”  (Some debts, however, are nondischargeable under the Code.)