What is bankruptcy?

Bankruptcy is a legal process in which individuals and businesses can eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. Of the several bankruptcy chapters provided for in the United States Code, they boil down to two types: liquidation (sometimes called “straight”) and reorganization.

Chapter 7 bankruptcy can also be called “liquidation” bankruptcy because the bankruptcy trustee may take and sell (“liquidate”) some of your property to pay back some of your debt.  However, you may keep property that is protected (or “exempt”) under state law.  For many debtors, all of their property is exempt and none of their property is liquidated.

The second type of bankruptcy is “reorganization” bankruptcy.  There are several different reorganization chapters, but Chapter 13 is the most common for consumers. In Chapter 13, no property is sold to repay debt.  Instead, the debtor agrees to make monthly payments over three to five years to repay all or some of the debt. While some debts must be paid in full, other debts may be partially repaid or not at all.