Man with no money holding empty wallet

What Is Bankruptcy – What Does It Mean?

Bankruptcy gives an individual or organization a fresh start by forgiving unpayable debts while providing creditors a chance to be repaid based on liquidated assets.

In theory, bankruptcy helps the economy because it gives people and businesses another chance to get credit and pay back debts.

After bankruptcy, the debtor is absolved of former debts.

Federal courts handle all U.S. bankruptcy proceedings. A bankruptcy judge decides whether a debtor can petition for bankruptcy and if they should be discharged.

In bankruptcy cases, the Department of Justice chooses a person to represent the debtor’s estate. This person is called a trustee.

Unless a creditor objects, the debtor and the court rarely speak directly.

How Does Bankruptcy Work for You?

Individuals, families, and businesses drowning in debt can all get help getting back on their feet financially with the use of bankruptcy.

For many people, declaring bankruptcy is the next logical step after experiencing an unforeseen event, such as the loss of a job, a severe illness, or a divorce.

Filing for bankruptcy can help relieve the stress caused by medical bills, mortgage arrears, credit card debt, and other financial obligations.

By “voiding” or otherwise breaching the contracts between you and your bankruptcy creditors, filing for bankruptcy releases you from the need to pay the payments you owe. This is one way in which filing for bankruptcy might provide you with a new beginning.

However, creditors might also benefit from the bankruptcy process. Continue reading if you want to find out more.

What is the creditors’ role in the bankruptcy process?

The bankruptcy process is officially underway when you give the bankruptcy clerk your completed paperwork.

When you file for bankruptcy, you will write down everything about your current financial situation. This will show why you are in such dire financial shape.

For instance, here are some of the things you will need to tell the bankruptcy court:

  • How much do you make?
  • Who owes you money, and how much do you owe them?
  • Every piece of property you own.
  • Where do you keep your money if you have moved out or given the house away?
  • If someone has filed a lawsuit against you or you have access to a safe deposit box or storage space,

When you file for personal bankruptcy, the court will choose a trustee to handle your case. That trustee will be in charge of looking over the papers related to your filing.

If the bankruptcy trustee decides that you can pay some amount to your creditors, the trustee will ensure that each bankruptcy creditor gets the amount to which the law says that the creditor is entitled.

If the trustee decides that you can pay some amount to your bankruptcy creditors, the trustee will ensure that each bankruptcy creditor gets the amount to which the law says the creditor is entitled.

Depending on which type of bankruptcy you file for, the bankruptcy trustee will pay your creditors in three ways.

What are the three kinds of bankruptcy?

There are more than three types of bankruptcy, but Chapter 7, Chapter 13, and Chapter 11 are the ones that people and small businesses can use. Here is some information about each kind of bankruptcy.

Chapter 7 bankruptcy

They were finished in about four months. People who file for bankruptcy don’t have to pay back their debts but can lose their property.

Chapter 13 bankruptcy

It takes between three and five years to finish. In this type of bankruptcy, the person who files pays back some or all of what they owe their creditors. They don’t lose any of their property.

Chapter 11 bankruptcy

Varies in length. Everyone works to reorganize the filer’s finances, and the person who files for bankruptcy usually pays less to creditors. The filer may or may not have to sell the property to make a plan work.

Read on to find out more about each kind of bankruptcy.

What type of bankruptcy can be finished in the least amount of time?

When given a choice, most people file for Chapter 7 bankruptcy instead of any other type of bankruptcy. Why? It doesn’t require making payments to creditors and is done in about four months.

But the only thing this stripped-down version of bankruptcy does for people is helping them “discharge” or get rid of debts that can be discharged, like credit card balances, medical bills, and personal loans. It does not solve any other money problems that might come up.

Chapter 7 bankruptcy is best for people who don’t have much money left over after paying their monthly bills and don’t have more property than their state lets them protect, or “exempt,” with a bankruptcy exemption.

These people are the best candidates for bankruptcy. When someone files for bankruptcy, the court can take any property they own that is not exempt.

Either an individual or a business can file for this type of bankruptcy.

What is the type of bankruptcy that will help you the most?

Chapter 13 bankruptcy. Most of the time, it’s better to file for bankruptcy under Chapter 13 than under Chapter 7.

People who file for bankruptcy can use the three-to-five-year repayment plan to make up for missed mortgage payments and keep a home, or they can catch up on a late auto loan payment and keep the car.

Also, if someone files for Chapter 13 bankruptcy, their property is not taken away. Under the Chapter 13 plan, they can pay their creditors to keep any non-exempt property.

People who want to file for bankruptcy but can’t qualify for Chapter 7 because of their income or who want to keep property that they would lose if they filed for Chapter 7 might want to look into this type of bankruptcy.

Only sole proprietorships and individuals can file for bankruptcy under Chapter 13. Businesses and companies cannot file for this type of bankruptcy.

What is the most expensive type of bankruptcy to file for?

Chapter 11 Bankruptcy, Only a tiny number of Chapter 11 bankruptcy cases are filed each year. Why? This type of bankruptcy is hard to understand and expensive, and it’s usually filed by large and small businesses that need money.

People with too much debt to file for Chapter 13 bankruptcy can file for Chapter 11 bankruptcy instead.

What are the debts that cannot be discharged through the bankruptcy process?

If you file for bankruptcy under Chapter 7, these obligations will not be discharged when your case is concluded under that chapter. You will satisfy most of your non-dischargeable debts through the Chapter 13 repayment plan. (but not student loans.)

The following are the types of debts that are often not dischargeable:

  • Responsibilities related to domestic support, such as those for spousal support and child support, and income taxes accrued within years (and sometimes older taxes, too).
  • Rewards for injuries or deaths caused by driving drunk, as well as debt from student loans (unless you can show that it would be unfair to require repayment).
  • Before you declare bankruptcy, you should figure out if you can get rid of enough debt to make filing for bankruptcy worthwhile.

What are the pros and cons of bankruptcy?


  • It makes it possible for debtors to recover from default.
  • It eliminates some types of unsecured debts.
  • It avoids legal judgment.


  • A mark is left on one’s credit score as a result.
  • The collateral will be taken for debts that are secured by collateral.
  • Some debts, including child support payments, cannot be discharged.

What are the terrible effects of declaring bankruptcy?

It immediately adversely affects your credit score and will stay on your report for 7 to 10 years. There’s also the stigma of bankruptcy, where people think you have no character or can’t be trusted.

Is filing for bankruptcy a good idea?

Some people or businesses must file for bankruptcy because they can’t pay their bills. If your debts get too big to handle, you might have to sell off all of your assets or get sued for not paying or breaking a contract.

Even though bankruptcy is bad for your credit and reputation, it is a legal way to avoid the worst-case scenario above.

How Does One File for Bankruptcy?

Because declaring bankruptcy is a legal process, the first step is for the debtor to submit a petition to the appropriate bankruptcy court.

Usually, you need the help of a lawyer specializing in these kinds of cases to reach this goal.