Bankruptcy is a legal proceeding in which people who cannot pay their bills can get a fresh financial start.  The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court.  Filing bankruptcy immediately stops all of the debtor’s creditors from seeking to collect debts from them, at least until their debts are sorted out according to the law. Bankruptcy, however, cannot cure every financial problem.  Nor is it the right step for every individual.

Bankruptcy may make it possible for the debtor to:

·         Eliminate the legal obligation to pay most or all of their debts.  This is called a "discharge" of debts.  It is designed to give them a fresh financial start. 

·         Stop foreclosure on their house or mobile home and allow them an opportunity to catch up on missed payments.  Bankruptcy does not, however, automatically eliminate mortgages and other liens on their property without payment. 

·         Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed. 

·         Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt. 

·         Restore or prevent termination of utility service. 

·         Challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than they are really owed from the debtor.


Bankruptcy does not usually make it possible for the debtor to:

·         Eliminate certain rights of "secured" creditors.  A "secured" creditor has taken a mortgage or other lien on property as collateral for the loan.  Common examples are car loans and home mortgages.  The debtor can force secured creditors to take payment over time in the bankruptcy process and bankruptcy can eliminate their obligation to pay any additional money if their property is taken.  However, the debtor generally cannot keep the collateral unless they continue to pay the debt. 

·         Discharge certain types of debts singled out by the bankruptcy law for special treatment such as child support, alimony, some student loans, court restitution orders, criminal fines, and some taxes. 

·         Protect cosigners on the debtor’s debts.  When a relative or friend has co‑signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan. 

·         Discharge debts that arise after bankruptcy has been filed.  

Bankruptcy Types:

There are four types of bankruptcy cases provided under the law.

Chapter 7 (Straight Bankruptcy)

Chapter 7 is known as "straight" bankruptcy or "liquidation."  It requires a debtor to give up property which exceeds certain limits called "exemptions", so the property can   be sold to pay creditors.

In a bankruptcy case under Chapter 7, the debtor files a petition asking the court to discharge their debts.  The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) the debtor’s debts in exchange for them giving up property, except for "exempt" property which the law allows them to keep.  In most cases, all of their property will be exempt.  But property which is not exempt is sold, with the money distributed to creditors.

If the debtor want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a Chapter 7 case probably will not be the right choice for them.  That is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take their property to cover their debt.

Chapter 11 (Reorganization)

Chapter 11 is known as "reorganization".  It is used by business and a few individual debtors whose debts are very large.

In a bankruptcy case under Chapter 11, the debtor, usually involving a corporation, sole proprietorship, or partnership, files a plan of reorganization to keep its business alive and pay creditors over time.  A corporation exists separate and apart from its owners, the stockholders. The Chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company's stock. A sole proprietorship (owner as debtor), on the other hand, does not have an identity separate and distinct from its owner(s). Accordingly, a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors. Like a corporation, a partnership exists separate and apart from its partners. In a partnership bankruptcy case (partnership as debtor), however, the partners' personal assets may, in some cases, be used to pay creditors in the bankruptcy case or the partners, themselves, may be forced to file for bankruptcy protection.

Chapter 12

Chapter 12 is reserved for family farmers.

Chapter 13 (Adjustment of Debts)

Chapter 13 is known as "debt adjustment".  It requires a debtor to file a plan to pay debts (or parts of debts) from current income.

In a bankruptcy case under Chapter 13, the debtor files a "plan" showing how they will pay off some of their past due and current debts over three to five years.  The most important thing about a Chapter 13 case is that it will allow the debtor to keep valuable property especially their home and car which might otherwise be lost if they can make the payments which the bankruptcy law requires to be made to their creditors.  In most cases, these payments will be at least as much as their regular monthly payments on their mortgage or car loan, with some extra payment to get caught up on the amount they have fallen behind.

The debtor should consider filing a Chapter 13 plan if they own their home and are in danger of losing it because of money problems; are behind on debt payments, but can catch up if given some time; have valuable property which is not exempt, but can afford to pay creditors from their income over time; have tax obligations which would not be discharged in a Chapter 7 bankruptcy.

The debtor will need to have enough income in Chapter 13 to pay for their necessities and to keep up with the required payments as they come due.  The court sets a monthly payment that the debtor makes to a trustee and the trustee then pays the debtor’s creditors the required payments.

Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13.  Either type of case may be filed individually or by a married couple filing jointly.