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What is 'Bankruptcy'

Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.

BREAKING DOWN 'Bankruptcy'

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid, while offering creditors a chance to obtain some measure of repayment based on the individual's or business' assets available for liquidation. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses a second chance to gain access to consumer credit and by providing creditors with a measure of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.

Bankruptcy filings in the United States fall under one of several chapters of the Bankruptcy Code: Chapter 7, which involves liquidation of assets; Chapter 11, which deals with company or individual reorganizations; and Chapter 13, which is debt repayment with lowered debt covenants or payment plans. Bankruptcy filing specifications vary among states, leading to higher and lower filing fees depending on how easily a person or company can complete the process


Chapter 7 Bankruptcy

Individuals or businesses with few or no assets file Chapter 7 bankruptcy. The chapter allows individuals to dispose of their unsecured debts, such as credit cards and medical bills. Individuals with nonexempt assets, such as family heirlooms; collections with high valuations, such as coin or stamp collections; second homes and vehicles; and cash, stocks or bonds, must liquidate the property to repay some or all of their unsecured debts. Consumers who have no valuable assets and only exempt property, such as household goods, clothing, tools for their trades and a personal vehicle up to a certain value, repay no part of their unsecured debt.

Chapter 11 Bankruptcy

Businesses often file Chapter 11 bankruptcy, the goal of which is to reorganize and once again become profitable. Filing Chapter 11 bankruptcy allows a company to create plans for profitability, cut costs and find new ways to increase revenue. For example, a housekeeping business filing Chapter 11 bankruptcy might increase its rates slightly and offer more services to become profitable. Chapter 11 bankruptcy allows a business to continue conducting its daily operations without interruption, while working on a debt repayment plan under the court's supervision. In rare cases, individuals file Chapter 11 bankruptcy.

Chapter 13 Bankruptcy

Individuals who make too much money to qualify for Chapter 7 bankruptcy may file under Chapter 13. The chapter allows individuals and businesses to create workable debt repayment plans. In exchange for repaying their creditors, the courts allow these debtors to keep all of their property including nonexempt property.