What is Bankruptcy?
Bankruptcy is a federal legal process designed to help individuals and businesses eliminate or repay their debts under the protection of the bankruptcy court. It provides a financial fresh start for borrowers who can no longer meet their obligations, but it comes with severe, long-lasting consequences for their credit profile.
Chapter 7 vs. Chapter 13 Bankruptcy
For individual consumers, bankruptcy generally falls into two primary categories: The U.S. Courts bankruptcy basics guide explains the difference between Chapter 7, Chapter 11, and Chapter 13 filings and the legal process involved.
Chapter 7 (Liquidation Bankruptcy)
Chapter 7 is designed to wipe out most unsecured debts, such as credit card balances and medical bills. The court may mandate that certain non-exempt assets be sold (liquidated) to repay creditors, though many filers find that all of their property is exempt. To qualify, you must pass a "means test" proving your income is below a certain threshold.
Chapter 13 (Reorganization Bankruptcy)
Chapter 13 allows individuals with a regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. This is often used by homeowners who want to stop foreclosure proceedings and keep their property.
What Bankruptcy Does Not Cover
While bankruptcy can discharge consumer , it cannot eliminate all financial obligations. The following debts generally survive a bankruptcy filing:
- Most student loans (unless you can prove "undue hardship" in a separate adversary proceeding)
- Child support and alimony
- Recent tax debts owed to the IRS
- Fines or penalties owed to government agencies
