How Liquidation Works

Bankruptcy is a legal process that entails following certain steps and schedules. It is best done with the assistance of a bankruptcy attorney although you are allowed to go through it on your own. If you choose the latter, you will save a lot on lawyer’s fees but you risk committing errors that can get your case dismissed. 

If you are contemplating bankruptcy, you should obtain credit counseling from a government-approved organization within 180 days or 6 months before the date of your actual filing. A credit counseling session usually lasts 60 to 90 minutes and involves an evaluation of your financial situation, a discussion of the alternatives, and the creation of a personal budget plan. This is the first step you need to take and hopefully might shed some insight on alternatives other than bankruptcy. 

In a liquidation proceeding, you will need to prepare certain documents. Together with the certificate that you have already obtained for pre-bankruptcy counseling, you will have to submit the following documents together with your bankruptcy petition: Schedules of assets and liabilities; current income and expenditures; statement of financial affairs; schedule of executory contracts and unexpired leases; and copies of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case. Most important, you will have to fill out the Official Bankruptcy Forms which will list the creditors and the amount and nature of their loans as well as other information. You will also have to include a schedule of the exemptions in your petition. Since you will have to choose between a Federal package of exemptions and the state exemptions, consulting a lawyer will be important.

As soon as the petition for bankruptcy is filed, the “automatic stay” begins to be enforced. Your creditors and debt collectors are not anymore allowed to contact you to demand payment. They are also prevented from filing lawsuits, garnishing wages, or conducting any other action regarding your obligations.

Around 21 to 40 days after the petition is filed, a meeting of creditors will be held with the case trustee or bankruptcy administrator. Of course, you must attend the meeting and answer questions that the trustee and the creditors (if they choose to attend) may have for you. It’s imperative that you provide the trustee documents that may be requested of you and answer all questions truthfully as this will be done under oath. It is the role of the bankruptcy trustee to liquidate the nonexempt assets and use the proceeds to pay off the unsecured debts.

A couple of months or so after the creditors meeting (for as long as there are no lawsuits from your creditors to challenge your petition), you will be able to receive your discharge. This means that you will no longer be liable for your debts and your creditors do not anymore have the right to collect them from you.

After receiving your discharge from Chapter 7, it’s now time to start anew so you are sure that you will never have to go through the same grueling and stressful process again.

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