What is Bankruptcy?

Chapter 7 bankruptcy is often referred to as liquidation because a bankruptcy trustee can liquidate (convert to cash) your non-exempt assets to pay part of the your outstanding bills. The term liquidation is rather misleading, since most people who file for Chapter 7 bankruptcy do not have any exempt assets, and thus there is no actual liquidation.

Chapter 7 bankruptcy cases move relatively quickly, and you may receive your discharge in just a few months. A discharge will eliminate unsecured debts like credit card debt, medical bills, most personal loans, judgments resulting from car accidents, deficiencies on repossessed vehicles, some older tax debts, payday loans, and garnishments. Certain debts are classified "non-dischargeable debts" and cannot be discharged, or can only be discharged under very specific circumstances. These include child support, most student loans, and many tax debts.

When you owe money, you are a debtor, and the people or companies you owe money to are your creditors. "Bankruptcy" is a federal law that establishes an orderly process to provide protection to debtors and fair treatment to creditors. Bankruptcy proceedings, though not for everyone, can be very helpful to solve a financial crisis.

There are five different types of bankruptcy proceedings. The two most common types are referred to as Chapter 7 or Chapter 13 bankruptcies. Usually when people talk about "filing for bankruptcy," they mean Chapter 7. Chapter 7 is a roughly 90-day process that gives you the opportunity to wipe the slate clean, avoiding almost all of your debts without having to make any future payments. "Discharge" is the legal term that means you no longer have a legal obligation to repay a debt. In Chapter 7 your assets can be at risk and some debts will not be discharged. In addition, some transfers of property can be undone in bankruptcy.

Chapter 13 is a three- to five-year repayment proceeding. In Chapter 13 you gain protection for your assets, and you are able to repay certain debts such as child support arrearages, taxes, car payments and home mortgage arrearages over a three- to five-year time period rather than have your wages garnished or your assets seized. In exchange for this added benefit, you must agree to make a monthly payment of your disposable income to repay a portion (sometimes all) of your debts. Chapter 13 is often an excellent alternative when consumer credit counseling or Chapter 7 are not available options.