The most drastic method of settling financial problems, it involves liquidating, or selling, the debtor s non-exempt property and possessions and distributing the proceeds to the creditors. Most people who file Chapter 7 do not have many non-exempt assets. Upon filing for Chapter 7 bankruptcy in bankruptcy court, a person places his assets under the protection of the court and submits a Statement of Financial Affairs describing his background and financial history. The court notifies the person s creditors of the filing, and collection efforts stop. The person also submits to the court schedules of all his assets and liabilities.
Bankruptcy law allows the person to exempt some assets from liquidation.
For secured debts such as a car loan or home mortgage, the debtor must continue to make payments on those loans to keep the asset. Otherwise, the creditor may petition the court for permission to repossess the asset. A trustee receives all the person s non-exempt assets, sells the items, and distributes the proceeds to creditors. The trustee pays administrative claims first and in full then priority claims, including taxes. Unsecured creditors receive proportionate payments based on the amount of remaining proceeds versus the total debt owed.