Bankruptcy, in general terms, is when you can’t pay your bills and you’re being hounded to pay them. This is a legal proceeding where the courts step in to discharge, or remove your debts.

In most cases, declaring bankruptcy is voluntary, however, some creditors can make the company or person who owes money (debtor) go into bankruptcy.

The segments below provide an overview of what you need to know about bankruptcy. They link to other articles that explain the information more thoroughly.

Main Bankruptcy Types

Several types or “Chapters” of bankruptcy are available. These are the six basic types:

  • Chapter 7 , also know as straight bankruptcy allows individuals or businesses to give up some “nonexempt” assets and clear most debts
  • Chapter 9 is municipality bankruptcy. This allows cities and towns to update their debt
  • Chapter 11 is also known as reorganization. This is mostly used by businesses that want to continue in business and repay creditors at the same time. They receive a court-approved plan to do this
  • Chapter 12 provides relief to family farmers and fishermen with regular income
  • Chapter 13 is available for individuals with a regular source of income and allows repayment of debts through an approved plan
  • Chapter 15 replaces Section 304. This was added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It’s designed to deal with cross-border bankruptcy proceedings

Bankruptcy Chapters for Individuals

Individuals most commonly file for Chapter 7 or Chapter 13 bankruptcy.

Once Chapter 7 is filed, your assets are taken over by a court-appointed trustee. The assets are turned into cash and the proceeds are distributed to creditors, the people you owe money to. The law allows you to keep “exempt” assets, such as a limited amount of real estate, vehicles, and other property. After a few months, you’re released from the debts you owe.

Under Chapter 13 relief, you’re able to keep and use all of your property, exempt or not, and pay some or all of your debts according to a court-approved plan. Debts aren’t immediately removed. You must complete the required payments under the plan before the debts are canceled, which could take several years. 

In 2005, a new bankruptcy law was passed that included a “means test.” This helps the court determine whether you have enough money available to make minimal payments under Chapter 13. You must also pass a means test to be eligible for Chapter 7.

What Is a Discharge in Bankruptcy?

A common term you’ll hear in bankruptcy is discharge. Basically, this releases you from personal liability for certain types of debts. The discharge prohibits creditors from using debt collection actions and communications with you to collect money. This can be telephone calls, letters and personal contact.

What Is an Automatic Stay?

During bankruptcy proceedings, an automatic stay starts immediately. This may be one of the most valuable actions since it forces an abrupt halt to repossessions, garnishments or attachments, utility shutoffs, foreclosures, evictions and other collection efforts.

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