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
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.)