Bankruptcy

A federal court process that lets people who cannot repay their debts eliminate some of them or repay them under court protection.

What it means

Most individuals file under Chapter 7 or Chapter 13. Chapter 7, sometimes called liquidation, can wipe out many unsecured debts within a few months; a trustee may sell nonexempt property, and filers must pass a means test based on income. Chapter 13 sets up a court-approved repayment plan lasting three to five years, often letting filers keep a home or car while catching up.

Filing triggers an automatic stay that halts most collection actions. Some debts usually survive, including most taxes, child support and, except in cases of undue hardship, student loans. A Chapter 7 can stay on a credit report for up to 10 years and a Chapter 13 for up to 7. Credit counseling is required before filing, and exemptions protecting property vary by state.

Example

Suppose someone owes $40,000 in credit card and medical debt with income too low to repay it. Under Chapter 7, that unsecured debt may be discharged, though the filing remains on the credit report for up to 10 years.

How it’s used

Overwhelming debt that cannot realistically be repaid
Stopping foreclosure, repossession or garnishment
Restructuring debt while keeping key assets

Strengths and weaknesses

Strengths

Can eliminate or restructure overwhelming debt
Automatic stay stops most collection efforts
Provides a legal fresh start

Weaknesses

Severe, long-lasting credit damage
Court and attorney costs
Some debts are not dischargeable and some property may be lost

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.