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A bankruptcy is when a person (or business) absolves their debts to acquire a "clean slate" while repaying creditors the largest amount possible by distributing the debtors finances and non-exempt assets. Bankruptcy legally forgives a person or company of their past debts regardless of whether they were completely paid off, and also protects the debtor from being further hassled by creditors and collection firms.
In America, bankruptcy is ruled primarily under Federal laws through the Bankruptcy Code; located in Title 11 of the United States Code. State law can intervene in certain situations, so while at the same time some generalizations can be made regarding the process - specifics might vary from state-to-state.
There are six distinct types of bankruptcy within the United States Bankruptcy Code, but Chapter 7 and Chapter 13 are most common for individuals.
Chapter 13 Bankruptcies
Chapter 13 is the equivalent of a government-arranged debt management program. To qualify, a debtor must have secured debts that total no more than $807,750,
and total unsecured debts less than $269,750.00. The debtor must also be bringing in sufficient income to make this an viable alternative to a Chapter 7 (see below).
Under a Chapter 13 arrangement, you can still retain your assets instead of handing them over to an estate, but you must submit monthly debt payments to a trustee, who in turn distributes the money to the lenders owed. These payments usually stretch out over three to five years, with any remaining debt discharged after that. A Chapter 13 will not be approved by the lenders if they would otherwise get a larger sum under a Chapter 7 arrangement.
Chapter 7 Bankruptcies
Chapter 7 is frequently referred to as liquidation or straight bankruptcy. Through a Chapter 7 a debtor will typically
have to give up their assets to a trustee, which are then sold or auctioned to bring in money that are used to pay back debts with any existing lenders. What
assets may be sold depends on which state you live in.
Some "necessities" like a vehicle and primary home are exempted in most states, as well as tools and equipment that are required to continue working afterwards.
When an individual files a petition for bankruptcy, a bankruptcy estate will be created. Non-exempt assets are moved over to this estate for liquidation. An impartial trustee will be appointed to represent this estate and figure out the appropriate distribution to those creditors who are owed money.
After filing a Chapter 7, debtors enter a 3 month span called discharge. A discharge is a court order that forbids creditors from any additional collection attempts on non-secured debts that were owed on or before the filing date.
Normal debts that are discharged are things like credit cards, medical bills, personal unsecured loans, and liability for negligence.
Not all debts can be included in a discharge, notably what's owed to the government and orders from family courts. Debts that are normally not included for discharge include student loans, taxes, spousal and child support, government fines and penalties.