In a chapter 7 bankruptcy—sometimes called “straight” bankruptcy or “liquidation” bankruptcy—the bankruptcy trustee liquidates the debtor’s non-exempt assets to pay unsecured creditors. Chapter 7 bankruptcies are what most of the general population thinks of when they think of bankruptcy.
A trustee is appointed as soon as the case is commenced. The trustee is to collect the debtor’s non-exempt property and supervise the liquidation of that property. The trustee is also required to distribute the cash proceeds of the estate property to the various creditors in the order of their priority as defined under the bankruptcy code.
Frequently, in chapter 7 bankruptcies, there are no non-exempt assets for distribution. Meaning, all of the debtor’s assets fit within an exemption. Thus, unsecured creditors receive nothing.
It can sometimes be frustrating when, as a creditor, you know of property the debtor possesses and know that he or she is allowed to keep that property after the bankruptcy while, as the creditor, you receive nothing. Exemptions allow debtors to essentially “remove” property from the trustee’s grasp. These assets are “exempt” from being liquidated to pay unsecured debt. Only non-exempt property is property of the estate, which the trustee may sell to pay creditors.
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