Bankruptcy

Definition

Bankruptcy is a legal proceeding through which a debtor who cannot repay their debts to creditors may seek relief from some or all of their financial obligations. This process can provide a fresh start for the debtor while ensuring fair treatment for creditors.

Purpose

The primary purpose of bankruptcy is to give debtors a chance to eliminate or repay their debts under the protection and guidance of the court. It aims to balance the interests of debtors needing relief and creditors seeking repayment. Bankruptcy can help individuals or businesses reorganize their finances, discharge debts, and begin anew.

Examples of Use

1. Chapter 7 Bankruptcy: Often referred to as "liquidation bankruptcy," where a debtor's non-exempt assets are sold, and the proceeds are used to pay off creditors. The remaining unsecured debts are typically discharged.
2. Chapter 13 Bankruptcy: Known as "reorganization bankruptcy" for individuals, allowing debtors to keep their property and repay debts over three to five years according to a court-approved plan.
3. Chapter 11 Bankruptcy: Commonly used by businesses, this type allows companies to continue operating while restructuring their debts through a court-supervised plan.
4. Chapter 12 Bankruptcy: Designed for family farmers and fishermen, providing a similar debt restructuring framework as Chapter 13 but tailored to the unique situations of these professions.

Related Terms

• Debtor: An individual or entity that owes money to creditors.
• Creditor: An individual or entity to whom money is owed by the debtor.
• Discharge: The legal elimination of debt through a bankruptcy proceeding, relieving the debtor from personal liability for specific debts.
• Trustee: A person appointed by the court to manage the debtor’s estate, oversee the bankruptcy process, and ensure creditors are treated fairly.
• Automatic Stay: A provision in bankruptcy law that temporarily halts lawsuits, foreclosures, garnishments, and most collection activities against the debtor once the bankruptcy petition is filed.

Notes

• Impact on Credit: Filing for bankruptcy can have a significant negative impact on a debtor's credit score and remain on their credit report for up to 10 years, affecting their ability to obtain credit in the future.
• Eligibility Requirements: Different types of bankruptcy have specific eligibility requirements and procedures that must be followed, such as means testing for Chapter 7.
• Non-Dischargeable Debts: Certain debts, like child support, alimony, certain taxes, and student loans, are typically not dischargeable in bankruptcy.
• Legal and Financial Advice: It is crucial for debtors considering bankruptcy to seek legal and financial advice to understand their options, the process, and the consequences.