Chapter 7 Bankruptcy: How are Estate Property and Financial Claims Handled?

–Guest Blogger: Savannah Brien, Financial Advisor

Chapter 7 bankruptcy, mostly known as the liquidation, is a court monitored process that helps debtors eliminate financial obligations. In Chapter 7 bankruptcy, the nonexempt property of the debtor is auctioned by the bankruptcy court and the proceeds are distributed amongst the creditors. In this way, debtors get to discharge their debts successfully and start fresh with finances.

However, the legal procedure is not simple and easy. The management of property, estate and bankruptcy claims is not that easy to understand for everyone. Only an experienced bankruptcy attorney can help understand the distribution of assets properly.

How Property and Financial Claims are Handled in Chapter 7 Bankruptcy

The process of liquidating debtor’s nonexempt assets includes a series of legal actions. The filing of claims must also be done in a proper way. Here are some essential facts about the property management and filing of claims that debtors must know before going ahead with the filing process:

1. The bankruptcy claims: In Chapter 7, bankruptcy laws allow unsecured creditors to file their claims with the bankruptcy court within 3 months or 90 days after the first creditors’ meeting. The time limit is 180 days for the government unit. Within that timeframe, government units can file their claims. For a no asset Chapter 7 case, creditors don’t need to file proof of claims as there will be nothing much to distribute. If during the procedure the bankruptcy trustee finds any asset for the distribution then the lenders will be notified accordingly. Court will provide additional time to file the claim as well. The situation is a bit different for the secured creditors. As per the bankruptcy laws, secured creditors don’t need to file the proof of claim.

2. The estate and property distribution: The distribution of estate and property is primarily governed by the Bankruptcy Code. As per the Code, there are 6 different classes of claims. Each of the classes must be paid completely before going to the next class. If anything remains after the complete payment of the classes, then that extra amount will be paid to the borrower. The debtor is generally not interested in the deposition of the estate properties by the bankruptcy trustee. The main interest for every debtor is to retain the exempt property and discharge as much debt as possible.

3. The role of the bankruptcy trustee in distribution: The bankruptcy trustee takes care of the property evaluation and distribution amongst creditors. The trustee is supposed to liquidate the assets so that the return to the creditors can be maximized. The liquidation is done by selling the debtor’s assets which are clear of any lien. If the property is worth more than the lien or security interest attached to it, then it can be liquidated easily. The trustee also has the “avoiding powers” and by using this he or she can try to recover property and money. Of course there are regulations the trustee must follow when using the avoiding power. This specific avoiding power includes the authority to undo the security interests and other prepetition transfer of property as well.

As you can see, there are numerous legal details to understand before you file Chapter 7 bankruptcy. So, it is obviously better to consult an experienced attorney and learn about the asset distribution and claims before taking any vital step.


Guest Bogger: Savannah Brien is an experienced financial advisor. She understands bankruptcy, estate planning and creditor’s claim related issues. She writes for numerous financial blogs and websites.