Bankruptcy is a legal procedure available to businesses and individuals who are unable to repay their debts. When a person enters bankruptcy, their assets may be evaluated and sold in order to pay off as much of their debt as possible.

What is Bankruptcy?

Bankruptcy is a tool designed to give individuals and companies a “fresh start” from debt. It is a process that allows consumers and businesses to repay some or all their debts under the protection of the federal bankruptcy court.

Bankruptcy begins with a petition filed by the debtor (you), or on behalf of a creditor. All assets will be measured and evaluated and may be used to repay a portion of outstanding debt. Theoretically, the availability of bankruptcy for both individuals and businesses can benefit the economy because it provides a second chance at gaining access to consumer credit while providing creditors with a measure of debt repayment.1

What are the types of Bankruptcies?

Per the United States Constitution, you can relieve all or part of your debts when you can no longer meet your obligations to creditors and lenders. The two types of personal bankruptcy are:

  • Chapter 7 Bankruptcy (Liquidation Bankruptcy) – Debtors can discharge all or part of their debt after liquid assets (can be converted into cash quickly, such as a checking or savings account) are used to repay some of the debt. To qualify for Chapter 7, you must pass a means test that proves your income is less than the median income for your family size in your state. If you fail, it means you can’t file Chapter 7 bankruptcy, but can you can file Chapter 13.
  • Chapter 13 Bankruptcy (Reorganization Bankruptcy)– Debtors repay all or part of their debt based on a repayment plan. Through a three to five-year repayment plan you will repay all or part of your debt. When filing for bankruptcy, you will submit a repayment plan to the court. After submission of the plan, you will begin making payments to the court. In return, the court will pay the creditors. Once you have completed your Chapter 13 repayment plan, your remaining debt will be discharged and you are no longer liable for discharged debts.

Personal bankruptcy laws are complex, so it is a good idea to seek outside counsel from an attorney before filing.2

What is the purpose of Bankruptcy?

The term bankruptcy is most commonly used negatively—so what is its purpose? The desired outcome of these bankruptcy proceedings is to be discharged, which means a creditor is permanently barred from collecting a debt against you (bankruptcy injunction). However, some debts are not dischargeable, such as tax debts and spousal support awards.3

What is Bankruptcy Fraud?

Bankruptcy is a federal system codified by Congress into the United States Bankruptcy Code, which means bankruptcy fraud falls under federal government domain. Bankruptcy fraud includes false oaths, failure to disclose debts or assets, and other fraudulent conduct. This means that when bankruptcy fraud is committed, it is a federal crime and you could go to jail.

The federal government pays close attention to bankruptcy fraud, but any creditor of a bankruptcy debtor can file a complaint against the debtor. A creditor might do this to deny the debtor a discharge for bankruptcy fraud, which might also bring you to court to seek judgment that the debt owed cannot be discharged through bankruptcy. It sounds complicated, and it is.

What are the positives of Bankruptcy?

An obvious positive of bankruptcy is the fact that you can discharge your debts (eliminate debt through forgiveness). When a person has been unable to pay their bills, it can be difficult. If eligible, you might be able to have your debts legally waived. Another pro (benefit) of bankruptcy is that the court will issue an automatic stay, which means creditors can no longer pursue you for money owed—say goodbye to harassing phone calls or letters from collection agencies.

Unlike what most people think, you will not lose your property in a bankruptcy filing (phew!). Federal and state laws have bankruptcy exemptions, which are assets trustees may not seize during Chapter 7 bankruptcy filings. And lastly, you will not be fired from your job. Under bankruptcy laws, you cannot be discriminated against by your employer if you file for bankruptcy.4

What are the Cons of Bankruptcy?

While bankruptcy can help get you out of debt, it does not eliminate all debts. Debts that will remain after filing for bankruptcy include:

  • Most recent back taxes
  • Most student loans
  • Alimony and child support
  • Fines owed to government agencies

Your credit history can take a big hit when you file for bankruptcy, and it can be on your record for 10 years. This can make securing a loan even more difficult in the future. It is not cheap filing for bankruptcy, and can include filing fees, trustees’ fees, credit counseling fees, and attorney fees—the numbers add up.

Take all this information into account before filing for bankruptcy. And, if you need further guidance, find an attorney who can help—bankruptcies can be difficult to navigate on your own.


  1. “What is Bankruptcy?” Investopedia. Accessed February 28, 2017.
  2. “Basic Types of Personal Bankruptcy” The Balance. Accessed February 28, 2017.
  3. “What is Bankruptcy?” The Balance. Accessed February 28, 2017.
  4. “The Pros & Cons of Filing for Personal Bankruptcy” Accessed February 28, 2017.