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Chapter 7


A debtor is permitted to claim certain property of his estate as exempt from liquidation proceedings. However, the debtor’s nonexempt assets are collected by a trustee representing the creditors. The trustee liquidates the assets and distributes the proceeds to the creditors. The debtor is then discharged from most debts. The term discharge basically means that the debt is deemed to be satisfied. Liquidation under Chapter 7 can be instituted voluntarily by the debtor, or he can be forced into Chapter 7 liquidation by creditors. This would be involuntary bankruptcy.

After the filing of the bankruptcy petition, the debtor needs protection from the collection efforts of its creditors. Therefore, the bankruptcy law provides that the filing of either a voluntary or involuntary petition operates as an automatic stay which prevents creditors from taking action against the debtor. This is similar to an injunction against the creditors of the debtor. The automatic stay ends when the bankruptcy case is closed or dismissed or when the debtor is granted a discharge.

The trustee in bankruptcy can be elected by the creditors. A trustee will be appointed by the court if a trustee is not elected by the creditors. The trustee automatically “owns” all of the nonexempt property of the debtor and also property inherited by the debtor within six months after the filing of the petition.

The U.S. Bankruptcy Code allows the debtor to keep certain of his property and claim it as being exempt from the claims of creditors. This is known as exempt property. Generally, the debtor has a choice of exempt property as described under State law or exempt property as described under the Federal Bankruptcy law. The debtor will of course choose the law which is most favorable. Some general exemptions under federal law involve the following, with some being exempt up to a statutory dollar amount:

• Interest (equity) in a residence;

• Household furnishings;

• Payments under a life insurance policy;

• Payments of alimony and child support; and

• Awards from personal injury actions.

The decree of the bankruptcy court which terminates the bankruptcy proceedings is generally a discharge that releases the debtor from most debts. However, a discharge does not release a debtor from certain debts. For example, the following types of debts are not dischargeable: taxes; student loans; loans obtained by use of a false financial statement; alimony and child support; debts not listed on the schedule of liabilities; liability for willful and malicious injury to property; judgments based upon driving while intoxicated; and certain consumer debts for luxury goods.

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Inside Chapter 7