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However, the steps preceding liquidation usually involve bankruptcy, which -- at the individual level -- virtually ruins a person's credit for several years, making it very difficult and expensive to borrow money.

However, the steps preceding liquidation usually involve bankruptcy, which -- at the individual level -- virtually ruins a person's credit for several years, making it very difficult and expensive to borrow money in the future.

Filing the Chapter 7 petition automatically stops most collection actions against the debtor, including lawsuits, garnishments, and phone calls. If all the debtor's assets are exempt or subject to liens, there may not be any assets to liquidate and hence no money to distribute to creditors.

If there are assets to liquidate, however, the creditors usually file a written claim so that they can receive some of the proceeds.

(In some cases, creditors can force a debtor into Chapter 7 by filing the petition themselves.) The debtor must provide the court with financial and tax information, as well as a list of creditors and outstanding debts.

In most cases, the court also requires proof that the individual has obtained credit counseling. trustee (or the court itself, in some states) then appoints an impartial trustee to handle the case and liquidate the debtor's assets.