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  • What is bankruptcy, and will the process wipe out all of my debts?

    Bankruptcy refers to a federal court procedure that allows debtors to catch up on their debts by having some of them discharged and others repaid, depending on the type of bankruptcy. The process is available to both businesses (which often file for Chapter 11) and consumers (usually Chapter 7 or Chapter 13).

    After getting court approval, the court shields you from lawsuits and some other adverse actions while you work through the procedure. For consumers, bankruptcies are almost always either “liquidations” (Chapter 7) or “reorganizations” (Chapter 13). In a Chapter 7 proceeding, property may be sold (liquidated) to pay back creditors. In a Chapter 13 proceeding, consumers typically keep most of their property but must establish a plan to repay at least some of their debt within three or five years.

    Bankruptcy can help you get rid of some, but not all, kinds of debt. For instance, unsecured debt from credit cards and hospital bills may be forgiven in many cases. But child support, alimony and taxes may not be discharged. Student loans are not dischargeable unless the debtor can prove that repayment would cause an undue hardship (which is very difficult to prove). Also, creditors may argue that a given debt should not be discharged, subject to the bankruptcy judge’s approval.