What Is Bankruptcy?
What Does It Mean to File for Bankruptcy?
Bankruptcy is a legal proceeding in which a debtor declares their inability to pay back their creditors.
The general idea behind declaring bankruptcy is that it allows debtors a “fresh start”while offering creditors a way to receive some or all of their owed payment.
Although some debts are forgiven, filing for bankruptcy affects the debtor’s creditworthiness.
When filing for bankruptcy, secured debts are usually paid for by the asset “securing”the debt, while many types of unsecured debts can be renegotiated.
What Is Bankruptcy? The Three Chapters of Bankruptcy
There are three common types of bankruptcy known as “chapters”in the U.S. bankruptcy code, Ch. 7, Ch. 11, and Ch. 13, each with varying criteria and consequences.
Ch. 7 Bankruptcy
The most common type of bankruptcy is Chapter 7.
Chapter 7 bankruptcy is known as “straight”or “liquidation”bankruptcy.
It is designed to give a “fresh start”by discharging debts that cannot be repaid through the liquidation of the debtor’s assets.
Upon filing Chapter 7, a trustee is appointed to sell the debtor’s non-exempt assets and distribute the proceeds to creditors.
For individuals, the law exempts certain assets such as retirement funds, primary residence, tools for their trade, and personal vehicles from being liquidated to pay back creditors.
This pays back creditors some of what they are owed and protects individuals from having all of their livelihood taken from them.
Ch. 11 Bankruptcy
Chapter 11 bankruptcy is primarily for companies, allowing them a break on paying their debts in order to restructure, come up with new terms for paying their creditors, and become profitable again.
This allows companies to stay afloat while coming up with a new way to pay back creditors.
Chapter 11 is the most complex and expensive form of a bankruptcy proceeding and should therefore be considered after other options have been explored.
Ch. 13 Bankruptcy
Chapter 13 bankruptcy, known as a “Debtor in Possession” Bankruptcy, stands in contrast with Chapter 7 because it allows the individuals to keep from liquidating their property.
Chapter 13 creates a new, more affordable payment plan for the debtor to repay creditors, usually lasting 3 to 5 years.
Once the payment plan is finished, the remaining unsecured debts are discharged.
You Can Avoid It
Bankruptcy is the least thing any business would want to experience. But sometimes because of reluctance, many business owners limit themselves from exploring the many benefits of getting help from financial advisors. Financial advisors can be a great help in steering a business to the path of profitability. Connect with a financial advisor in Beachwood, OH or check out our financial advisor page to see one closest to your area.
Bankruptcy FAQs
Bankruptcy Subtopics
- Are Bankruptcies Public Record?
- Are IRS Taxes Dischargeable in Bankruptcy?
- Bankruptcy – Who Gets Paid First?
- Can a Husband File Bankruptcy Without the Wife?
- Can Bankruptcy Save My House From Foreclosure?
- Can Bankruptcy Stop Foreclosure?
- Can Bankruptcy Stop Garnishment?
- Can Filing Bankruptcy Stop Wage Garnishment on Student Loans?
- Can I Buy a House While in Chapter 13 Bankruptcy?
- Can I File Bankruptcy Again?
- Can I File Bankruptcy and Keep My House and Car?
- Can I File Bankruptcy Without My Husband?
- Can I File Bankruptcy Without My Spouse?
- Can I File Chapter 7 Bankruptcy Again?
- Can I Keep My Car if I File Bankruptcy?
- Can I Keep My Car While in Chapter 13 Bankruptcy?
- Can I Keep My House in Chapter 7 Bankruptcy?
- Can Judgements Be Discharged in Bankruptcy?
- Can Student Loans Be Discharged in Bankruptcy?
- Can You Buy a Car While in Chapter 13 Bankruptcy?
- Can You Buy a House After Bankruptcy?
- Can You File Bankruptcy on a Judgement?
- Can You File Bankruptcy on a Judgement Against You?
- Can You File Bankruptcy on Child Support?
- Can You File Bankruptcy on Medical Bills?
- Can You File Bankruptcy on Student Loans?
- Can You File Bankruptcy on Taxes?
- Can You File Bankruptcy on the IRS?
- Can You File Bankruptcy Twice?
- Do Bankruptcies Clear Evictions?
- Do Bankruptcies Show Up on Background Checks?
- Does Chapter 13 Bankruptcy Cover Student Loans?
- Does Chapter 7 Bankruptcy Include Student Loans
- Do I Qualify for Bankruptcy?
- Do I Qualify for Chapter 7 Bankruptcy?
- Do You Have to Pay Taxes on Discharged Bankruptcy Debt?
- How Long After Bankruptcy Can I Buy a Car?
- How Long After Bankruptcy Can You Buy A Home
- How Long After Bankruptcy Can You Buy a House?
- How Long Are Bankruptcies on a Credit Report?
- How Long Does Bankruptcy Stay on a Credit Report?
- How Long Does Chapter 7 Bankruptcy Take?
- How Long Does Bankruptcy Stay on Credit?
- How Long Does Bankruptcy Stay on Public Record?
- How Long Does Bankruptcy Stay on Your Credit Report?
- How Long Does Chapter 7 Bankruptcy Stay on Credit Report?
- How Long Will Bankruptcies Stay on Credit History Reports?
- How Much Debt Do You Need to File for Bankruptcy?
- How Much Does a Chapter 13 Bankruptcy Cost?
- How Much Does Bankruptcy Chapter 7 Cost?
- How Much Does It Cost to File Bankruptcy?
- How Often Can You File Bankruptcy?
- How Often Can You File Chapter 7 Bankruptcy?
- How to Remove a Discharged Bankruptcy From a Credit Report
- What Are Advantages of Filing Bankruptcy
- What Are the Different Types of Bankruptcies?
- What Debts Are Discharged in Chapter 7 Bankruptcy?
- What Does Bankruptcy Discharged Mean?
- What Happens to My Car in Chapter 7 Bankruptcy?
- Bankruptcy Fraud
- Chapter 11 Bankruptcy
- What Is Chapter 13 Bankruptcy
- Chapter 7 Bankruptcy
- What Is the Downside of Filing for Bankruptcy?
- What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
- When Does Chapter 13 Bankruptcy Get Discharged?
- When Will Chapter 7 Bankruptcy Be Removed From Credit Report?
- Who Pays for Bankruptcies?

About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.