Home > SuperTips > Bankruptcy > What is a Bankruptcy Liquidation
SuperTips Categories

Share This:

What is a Bankruptcy Liquidation


Bankruptcy liquidation refers to the process of wiping the debts of a debtor off the books, forever ending the rights of a creditor to that amount owed. While Chapter 7 bankruptcy is often referred to as the bankruptcy liquidation chapter, there are also debts liquidated through Chapter 13 bankruptcy.

Bankruptcy Liquidation in Chapter 7

The process for bankruptcy liquidation in a Chapter 7 case can be quite simple. The debtor files a Chapter 7 petition, and if his income falls below the median income for the state, of if the debtor can show he has little or no disposable income to pay to creditors, most of the rest of his debts are liquidated. That applies mostly to unsecured debts, such as credit cards and some loans. If there are no objections by creditors or questions from the bankruptcy trustee, a Chapter 7 case can be discharged in as little as 4 to 5 months after filing. The discharge marks the liquidation of all non-secured debt in the case. Exceptions include:

  • Court-ordered child support
  • Alimony ordered by a court
  • Fines or restitution in connection with a criminal case
  • Divorce debts
  • Tax debts that aren't more than 3 years old
  • Luxury purchased greater than $500 within 90 days of the bankruptcy filing
  • Cash advances that total $750 with 70 days of the bankruptcy filing

Bankruptcy Liquidation in Chapter 13

The process for bankruptcy liquidation is not nearly is swift in a Chapter 13 case. Debtors propose a repayment plan that can be objected to by creditors. The repayment plan is expected to include all disposable income of the debtor divided each month among all the creditors. The repayment plan must make full payments on secured loans, such as mortgages and car loans. But the only required in the Bankruptcy is that the debtor pay at least as much as creditors would receive in a Chapter 7 plan. At the end of the plan, which is normally 5 years, the rest of any remaining debt to unsecured creditors is discharges. The discharge can often wipe away a lot of debt. It isn't uncommon for Chapter 13 plans to only pay 10 percent of unsecured debt. Exceptions to bankruptcy liquidation in Chapter 13 include:

  • Claims for child support and spousal support (alimony);
  • Educational loans;
  • Drunk driving liabilities;
  • Criminal fines and restitution obligations;
  • Certain long-term obligations, such as home mortgages, that extend beyond the term of the plan; and
  • Any debts not provided for in a wage-earner plan.

Find local Bankruptcy Resources