What is Bankruptcy?

Bankruptcy is a federal legal procedure conducted in U.S. Bankruptcy Courts and governed by Title 11 of the United States Code, designed to assist individuals and businesses facing insolvencies by restructuring or discharging their outstanding debt obligations. Filing for bankruptcy activates an immediate 'automatic stay,' which legally prohibits creditors from executing collection actions, foreclosing on properties, repossessing vehicles, pursuing civil lawsuits, or garnishing wages during the court proceedings. The primary goal of consumer bankruptcy is to provide debtors with a 'fresh start' while offering an orderly, equitable mechanism for distributing available assets to creditors.

For individual consumers, bankruptcy is primarily filed under one of two chapters. Chapter 7 bankruptcy, or liquidation, involves a court-appointed trustee selling the debtor’s non-exempt assets to satisfy creditors, after which the remaining eligible unsecured debts (such as credit cards and medical bills) are discharged. Under state and federal exemption laws, many debtors can protect core assets like their primary residence and vehicle. Chapter 13 bankruptcy, or reorganization, is designed for wage earners with steady incomes; it allows debtors to retain their assets by committing to a court-approved three-to-five-year repayment plan to pay off a portion or all of their liabilities. Bankruptcy is a severe credit event: under the Fair Credit Reporting Act (FCRA), Chapter 7 bankruptcies remain on credit reports for up to ten years from the filing date, while Chapter 13 filings remain for seven years. Additionally, certain debts, including student loans, child support, alimony, and recent tax liabilities, are legally non-dischargeable under most circumstances.