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What is Bankruptcy Liquidation?

Liquidation takes place as part of a Chapter 7 bankruptcy when assets are sold to pay creditors.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 September 2014
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Bankruptcy liquidation, also known as Chapter 7 liquidation, involves the selling of assets as a means of paying a portion of outstanding debts owed to creditors. While filing for bankruptcy liquidation ultimately dismisses all debt, it is not unusual for creditors to be offered some type of percentage payment on the balances owed by the debtor. The process of liquidating assets to provide that percentage payment is normally overseen by the court of jurisdiction or a trustee or administrator appointed by the court.

The purpose of the bankruptcy liquidation is to create the best possible solution for all parties concerned. By requiring the sale of certain assets in order to repay a portion of the outstanding indebtedness, the court of jurisdiction ensures that creditors do not experience a total loss due to the dismissal of the debt. At the same time, the debtor is freed from a debt load that he or she can no longer hope to pay off under any circumstances.

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Filing for bankruptcy liquidation is a process that will vary somewhat from one jurisdiction to another. Specifics regarding the types of assets that may be considered viable sources of revenue to apply to the debt will not be the same in every location. However, assets that are considered to be necessities are usually exempt from sale. For example, clothing would be considered an essential, as would most household appliances. Equipment or tools needed by the debtor to continue working in his or her profession are also considered by most courts to be necessities and not subject to sale in order to repay debt.

Meeting the requirements of eligibility is essential before a court will consider a plea for bankruptcy protection. In many locations, individuals or couples who are seeking to file for bankruptcy liquidation must be able to demonstrate hardship, such as earning an income that is less than or equal to the median level of income. Factors such as job loss, reversals in health, or other emergency situations may also be grounds for allowing the bankruptcy to take place. In addition, the petitioner cannot have filed for bankruptcy in any form for at least a period of six years. In some cases, that period is as long as ten years, depending on the type of bankruptcy previously filed and the laws governing bankruptcy proceedings in the jurisdiction.

While bankruptcy liquidation is sometimes the only way to resolve debt issues, most financial analysts recommend that all other possible means of settling outstanding debt be investigated before filing for any type of bankruptcy. The incidence of a bankruptcy liquidation will remain on the credit report for a number of years and may prove to be more inhibiting to future purchases than other forms of debt resolution.

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