What is bankruptcy?

Bankruptcy is the legal process where persons declare that they are unable to pay their debts and request relief from the court. There are two basic purposes of bankruptcy: to give the debtor a fresh start and to repay creditors to the extent that the debtor has non-exempt assets.

Bankruptcy comes in two forms, liquidation and reorganization. The four types of bankruptcies available to private individuals fall under one of these two forms.

1. Liquidation Chapter 7, also known as “liquidation,” is usually the simplest and quickest form of bankruptcy. In a Chapter 7 bankruptcy, the bankruptcy court appoints a trustee who gathers and sells any non-exempt property that you might have, and uses the proceeds to pay your creditors. Chapter 7 is available to individuals, married persons, corporations and partnerships.
2. Reorganization Chapter 11, a reorganization, is primarily used by business debtors but sometimes by individuals who have substantial assets and debts. Under Chapter 11, a business is allowed to continue operating while the court supervises the reorganization of the company’s debts and determines whether to grant partial or complete relief.
3. Chapter 12 is a special type of bankruptcy set aside only for family farmers
4. Chapter 13 is the reorganization of an individual’s debts where the individual pays off the debt, or some portion of the debt, usually over a 3 to 5 year period, under a plan approved and supervised by the court.