What is Bankruptcy?

Bankruptcy is a federal legal process that gives you a fresh start when you can't pay your debts. It provides relief from creditors through an 'automatic stay,' which halts collections, foreclosure, and garnishments. The process is governed by the U.S. Bankruptcy Code and conducted in federal bankruptcy courts.

The two primary chapters of consumer bankruptcy are Chapter 7 and Chapter 13. Chapter 7 bankruptcy, or liquidation, involves selling non-exempt assets to pay creditors, after which eligible unsecured debts (like credit cards and medical bills) are discharged. Chapter 13 bankruptcy, or reorganization, allows borrowers to keep their assets by agreeing to a court-approved three-to-five-year repayment plan to pay back creditors.

Bankruptcy is a major financial event with long-term credit consequences. Under FCRA guidelines, Chapter 7 bankruptcy remains on credit reports for up to 10 years from the filing date, while Chapter 13 remains for up to seven years. Bankruptcy typically does not discharge student loans, child support, or tax liabilities.