Bankruptcy FAQ

What Happens In a Chapter 7 Bankruptcy Proceeding?

A Chapter 7 case begins with the debtor's filing of his or her petition and schedules with the bankruptcy court, which triggers the automatic stay - bankruptcy terminology for the termination of most debt-collection activity. Filing a bankruptcy petition does not stay the collection of support obligations. As long as the automatic stay is in place, creditors may not initiate or continue lawsuits against the debtor, garnish wages or contact the debtor demanding payments or for any other reason.

Each debtor must file a list of assets and liabilities; a schedule of current income and expenditures; a statement of financial affairs; and other documents related to the debtor's finances, including a Means Test calculation. Debtors also must file a certificate of completion of a debt counseling class.

The court appoints a trustee who oversees each Chapter 7 case and, where appropriate, liquidates the debtor's nonexempt assets to pay a portion of his or her debts.

All states, including Oregon, have exemption statutes which allow debtors to protect certain property from being liquidated in bankruptcy. Oregon's exemptions include modest amounts for a homestead, motor vehicles, household furnishings, and most other personal property. In most cases, the debtor's assets are exempt or already subject to valid liens, so often there are no assets for the trustee to liquidate.

The trustee can also recover money for the debtor's bankruptcy creditors under the trustee's "avoidance powers." These powers include the power to set aside preferential transfers (large payments) to creditors within 90 days of filing; undo security interests and pre-petition transfers that were not properly perfected; and pursue other transfers or payments made to friends or family members within a year or more of filing bankruptcy.

Each debtor must attend a Meeting of Creditors, conducted by the trustee about a month after the debtor files his or her case. During this meeting debtors are placed under oath, must prove their identity and answer questions relating to their assets. Creditors may also attend and ask questions of the debtor but rarely do so. Typical meetings of creditors last no more than 10-15 minutes per case.

Most debtors choose to keep their homes and vehicles when they file bankruptcy. When a debtor wants to keep certain secured property (such as a car) after filing bankruptcy, he or she may choose to reaffirm the debt. In a reaffirmation agreement, the debtor and creditor agree that the debtor will pay all or part of an otherwise dischargeable debt after bankruptcy. The creditor promises that it will not repossess the collateral as long as the debtor continues to pay the debt. Reaffirmation agreements must be entered into before Discharge is entered and they must be signed by the debtor and filed with the court. Such agreements are voluntary and often not in the debtor's best interest.

Prior to receiving a Discharge all debtors also must complete a financial management course.

Approximately 60 days after the debtor's Meeting of Creditors, most debtors receive their Discharge.  This means that their dischargeable debts no longer exist and the debtor has no legal obligation to pay them. Some debts, such as student loans, most taxes, damages resulting from the debtor's willful or malicious acts, debts incurred by giving false financial information, domestic support obligations and some debts incurred just prior to filing for bankruptcy, are non-dischargeable and survive the bankruptcy.

The court may also deny a discharge to any debtor who fails to keep or produce financial records; fails to satisfactorily explain any loss of assets; commits perjury; fails to follow an order of the court; fraudulently transfers or hides property; or fails to complete the required financial management course.