Liquidation Vs. Bankruptcy


While the terms bankruptcy and liquidation are often used together, they technically mean two different things. Liquidation is part of filing for Chapter 7 bankruptcy, but it is not the entire process. Bankruptcy deals with a much more broad scope of events that lead to the eventual discharge of your debts.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a type of protection that allows you to get the majority of your debts discharged. When you go through Chapter 7 bankruptcy, the court requires you to go through credit counseling. After the credit counseling occurs, the court will appoint a bankruptcy trustee to your case. At that point, the bankruptcy trustee will review your assets and determine if you are hiding anything from the court. The court also issues an order of automatic stay, which prevents creditors from trying to collect from you. At the end of the process, the court discharges your debts.


Liquidation is a process that takes place within the bankruptcy filing. Once the bankruptcy court appoints a trustee to your case, the trustee has the right to take much of your property and sell it. This process of selling your property is known as liquidation. The money earned from selling your property is used to pay off some of your creditors. Your creditors are paid off according to the order of their priority.

Exempt Property

During the liquidation process, the trustee cannot simply take any property that he wants. Certain types of your property are exempt from being sold through bankruptcy liquidation. For example, the bankruptcy trustee will not sell tools of your trade and will leave you with basic necessities such as clothing and groceries. A certain amount of equity in your home is also typically exempted from bankruptcy liquidation. The bankruptcy court may also leave you with a car to drive.

Completing Bankruptcy

After the liquidation process occurs, the bankruptcy court will require you to go through a debt class. At that point, your debts will be discharged by the court. Your creditors can no longer attempt to collect the debt from you, and it will be forgiven. At that point, your credit will be damaged, and you will not be able to qualify for any additional credit for some time — if you take the necessary steps to build your credit, you could get financing within one to two years after discharge. Property left over after the liquidation and bankruptcy discharge is yours to keep.

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