Bankruptcy: What It Is, How It Works, and Your Options

Bankruptcy Explained

Bankruptcy is a federal legal remedy for consumers and businesses that can no longer honor their debts. Filing creates an automatic stay, suspending collection calls, lawsuits, and wage garnishments while the court reviews assets, liabilities, and repayment capacity.

Main Bankruptcy Chapters

Chapter 7

Known as liquidation bankruptcy, Chapter 7 wipes out qualifying unsecured debts in about six months. A trustee may sell non-exempt property to pay creditors, yet most filers keep essential assets through state or federal exemptions.

Chapter 13

Chapter 13 restructures debt through a three-to-five-year repayment plan funded by future income. It can stop foreclosure, catch up on mortgage arrears, and consolidate credit card balances into one predictable monthly payment.

Chapter 11

Typically used by corporations but also available to high-debt individuals, Chapter 11 lets the debtor remain in control while proposing a reorganization plan that preserves jobs and business value.

Pros and Cons

Benefits include immediate relief, permanent discharge of eligible debts, and a clear timetable for rebuilding credit. Drawbacks are public records, attorney fees, and a seven-to-ten-year credit report entry that can raise loan costs. For many filers, the trade-off is still worth the financial relief.

Eligibility Rules

The Chapter 7 means test compares household income to state medians; those who exceed limits may elect Chapter 13. All applicants must complete approved credit counseling within 180 days before filing.

Alternatives to Consider

Debt management plans, consolidation loans, or direct negotiations might reduce interest rates without court involvement. Exploring these options first can preserve credit and avoid legal complexity.

Next Steps

List every creditor, gather pay stubs and tax returns, then schedule a consultation with a licensed bankruptcy attorney or nonprofit counselor. An expert can explain costs, timelines, and the lasting impact on finances, empowering you to choose the best path toward a fresh start.