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Bankruptcy Definition: What Exactly Is It?

Bankruptcy is a generalized term for a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors. If you can prove that you are entitled to it, the bankruptcy court will protect you during your bankruptcy proceeding. In general, bankruptcies can be categorized into two types:

Among the different types of bankruptcies, Chapter 7 and Chapter 13 proceedings are the most common for individuals and businesses. Chapter 7 bankruptcies normally fall in the liquidation category, meaning your property could be sold in order to pay back your debts.

Conversely, Chapter 13 bankruptcies generally fall under the reorganization category, meaning that you will probably be able to keep your property, but you must submit and stick to a plan that will allow you to repay some or all of your debts within three to five years.

Chapter 7 Bankruptcy 101

Both individuals and businesses are allowed to file for Chapter 7 bankruptcy. These proceedings typically last between three and six months.

In a Chapter 7 bankruptcy proceeding, some of your property may be seized and sold to pay off some or all of your debts. This is known as "liquidation of property."

However, as a benefit of this type of bankruptcy proceeding, any unsecured debts (debts that are not guaranteed by collateral) will be wiped out. In addition, there are certain types of property that cannot be sold in order to pay off your debts, such as the furniture in your home, your car, and your clothes.

Secured debts are treated differently than unsecured debts in a Chapter 7 bankruptcy proceeding. In a Chapter 7 bankruptcy proceeding, you (the debtor) have to make a choice between allowing the creditor to repossess the property that secures the debt, continuing to make payments on your debt to the creditor, or paying the creditor a sum equal to the replacement value of the property that secures the debt. In addition, some types of secured debts can be wiped out during a Chapter 7 bankruptcy proceeding.

Before you can file for Chapter 7 bankruptcy, you must be able to show that you are eligible to file for Chapter 7. To be eligible for Chapter 7, you cannot make enough money (minus certain expenses and monthly debt payments) to be able to fund a Chapter 13 bankruptcy repayment plan. There are other requirements to be eligible to file for Chapter7 bankruptcy.

Debts Not Wiped Out By Chapter 7 Bankruptcy

While credit card debt, unsecured loans, and other debts can be forgiven in Chapter 7, things like child support, taxes that are due, and alimony payments cannot be wiped out. For more debts that will remain after a Chapter 7 bankruptcy proceeding, see Debts that Remain After a Chapter 7 Discharge.

Chapter 13 Bankruptcy 101

Also known as the "wage earner" bankruptcy proceeding, only people with a reliable source of income are allowed to file for Chapter 13 bankruptcy.

In Chapter 13 bankruptcy in federal court, you must work with the court to come up with a repayment plan, and stick with the plan over the next three to five years. The amount you will need to pay is based upon your income, how much debt you owe, and how much the creditors of your unsecured loans would have received if you had filed under Chapter 7 instead of Chapter 13.

In order to be eligible to file for Chapter 13 bankruptcy, you must be able to show that your debt is under the limits for filing. If you have more than either of these amounts, you may not be able to file for Chapter 13 bankruptcy protection.

Chapter 13 bankruptcy may allow you to repay secured debts, even if you are behind on payments, without having the property that secures the debt be repossessed. You may be able to put your past due payments into your debt repayment plan and pay them off over a period of years.

Chapter 11 Bankruptcy 101

Chapter 11 bankruptcy proceedings are normally used by struggling businesses as a way to get their affairs in order and pay off their debts.

In addition, some individuals also file for Chapter 11 bankruptcy when they are not eligible for Chapter 13 bankruptcy or own large amounts of non-exempt property (like several homes). However, Chapter 11 can be much more expensive and time-consuming when compared to Chapter 13.

Chapter 12 Bankruptcy 101

Chapter 12 bankruptcy is very much like Chapter 13 bankruptcy, except that it is only available to people that have debts from a family farm or family fishing operation.

If you are not sure what is right for you, contact a bankruptcy attorney for guidance on your situation.

You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help

Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.

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Next Steps

Contact a qualified bankruptcy attorney to find out your options for navigating the best path forward.

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