Bankruptcy

Bankruptcy is a legal process in a specialized federal court to help individuals and businesses get rid of debt or repay debts under the protection of the bankruptcy court.

All bankruptcy cases are filed in federal bankruptcy court in the area where you live or where your business is located. There are two main categories of bankruptcy: “liquidation” and “reorganization.” Liquidation bankruptcy (also called Chapter 7 bankruptcy) is usually used by individuals (and sometimes by businesses) whose expenses are greater than their income, and who cannot pay their debts. One of the main purposes of liquidation bankruptcy is to wipe out certain debt and give you a fresh start. In an individual liquidation bankruptcy, the court will discharge certain debts that you owe, which means that the debts do not have to be paid. In exchange for the discharge, though, your nonexempt property (if any) may be sold, and the money used to pay your creditors.

Reorganization bankruptcy can be used only if you have sufficient income to pay most of your debts over a period of time. There are several types of reorganization bankruptcies, but Chapter 13 is the type most commonly used by individuals or consumers. In Chapter 13 bankruptcy, you keep all of your property, but you must make monthly payments over three to five years to repay all or some of your debts. Reorganization bankruptcy requires that you file a repayment plan that has to get approved by the bankruptcy court.

Once you have filed bankruptcy, your creditors cannot go after your assets by garnishing your wages, repossessing your car, foreclosing on your house, or cutting off your utility services. This is called the “automatic stay.” At the end of the bankruptcy process, all of your debts are discharged or wiped out, except those debts that cannot be discharged in bankruptcy, such as child support, spousal support, student loans (except under extraordinary circumstances), and most tax debts.

Legal Editor: James Shenwick, March 2015 (updated December 2017)