I. Business Chapter 7
If a business files for Chapter 7 bankruptcy protection, the Chapter 7 Trustee assigned to the case seizes all of the business’s assets and liquidates them. As part of the liquidation the Trustee pays off all encumbrances against the assets — e.g., mortgages against real property — pays the cost of selling the assets, takes the statutory cut found in 11 U.S.C. § 326(a), and distributes the remaining proceeds to the creditors according to the priority rules found in 11 U.S.C. §§ 507(a) and 726(a).
When the smoke all clears the debtor ceases to exist, which is why a business is ineligible for a Chapter 7 discharge pursuant to 11 U.S.C. § 727(a)(1).
II. Personal Chapter 7
I am pleased to report that although the title of Chapter 7 in the Bankruptcy Code is “Liquidation,” no individual debtors are liquidated in a Chapter 7 bankruptcy. However, there can be a liquidation component to the case.
A. Exempting Assets
I have already written about exempting assets many times — see, e.g., the September 16, 2011 post. Therefore, I won’t discuss that topic here; other than to say that in a personal Chapter 7 bankruptcy the debtor keeps the exempt assets, while the Chapter 7 Trustee seizes and liquidates the nonexempt assets for the benefit of creditors.
B. The Liquidation
When faced with a nonexempt asset, a Trustee must answer a question: Is it worth the time, effort, and expense to do the liquidation? Here is the analysis the Trustee will do:
1. How much is the asset worth?
Although the debtor provides an estimated value in the bankruptcy papers, this estimate does not bind the Trustee — even if the estimate was a professional appraisal of the property. The only way to really determine the value of the asset is to put it on the market because an asset is only worth what the market will pay for it. Of course, a professional appraisal may dissuade the Trustee from taking further action because the appraisal may indicate the futility of selling the asset due to the required payout discussed below.