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Bankruptcy

What is Bankruptcy?

A legal proceeding that provides relief for individuals or businesses unable to pay their debts, allowing them to eliminate or restructure debt under court protection.

Understanding Bankruptcy

The main consumer bankruptcy chapters are Chapter 7 (liquidation) and Chapter 13 (repayment plan). Bankruptcy provides an automatic stay stopping collection actions and can discharge most unsecured debts. It affects credit scores but offers a fresh financial start.

Examples

  • 1Chapter 7 discharge eliminating credit card debt
  • 2Chapter 13 plan restructuring mortgage arrears
  • 3Business filing Chapter 11 to reorganize

Why This Matters in Legal Cases

Bankruptcy provides a legal fresh start for people overwhelmed by debt, but it has serious long-term consequences. A bankruptcy filing stays on credit reports for 7-10 years and affects the ability to get loans, rent housing, and sometimes even get certain jobs. Understanding which debts can be discharged, which assets are protected, and the differences between Chapter 7 and Chapter 13 helps clients choose the best path forward.

Explaining to Clients

Approach bankruptcy discussions without judgment—clients are often embarrassed about their financial situation. Explain that bankruptcy is a legal right designed to help people in difficult circumstances, not a moral failing. Walk through the key decision: Chapter 7 (quick discharge but you may lose some assets) versus Chapter 13 (keep your assets but repay a portion of debts over 3-5 years). Discuss alternatives like debt negotiation if appropriate.

Frequently Asked Questions

What debts can be eliminated in bankruptcy?

Most unsecured debts can be discharged, including credit card debt, medical bills, personal loans, and utility bills. However, some debts generally cannot be discharged: student loans (except in rare hardship cases), child support and alimony, most tax debts, and debts from fraud or intentional wrongdoing. Secured debts (mortgages, car loans) require surrendering the collateral or continuing payments.

Will I lose my house or car if I file for bankruptcy?

Not necessarily. Every state provides exemptions that protect certain property. In Chapter 7, exemptions may protect your home equity (homestead exemption), vehicle (up to a certain value), personal belongings, and retirement accounts. In Chapter 13, you keep all your property and repay creditors through a court-approved plan. The specific exemptions vary significantly by state.

How long does bankruptcy stay on my credit report?

A Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date. A Chapter 13 bankruptcy remains for 7 years. However, the impact on your credit score diminishes over time, and many people begin rebuilding credit within 1-2 years after discharge by using secured credit cards and making timely payments.

Sources

Related Terms

Discharge (Bankruptcy)

The court order that eliminates a debtor's personal liability for certain debts, meaning the debtor is no longer legally required to pay them.

Chapter 7 Bankruptcy

A liquidation bankruptcy where non-exempt assets are sold to pay creditors, and remaining eligible debts are discharged, giving the debtor a fresh start.

Chapter 13 Bankruptcy

A reorganization bankruptcy where debtors propose a 3-5 year repayment plan to pay off all or part of their debts while keeping their property.

Automatic Stay

An injunction that takes effect immediately upon filing bankruptcy, stopping most creditor collection actions including lawsuits, wage garnishment, and foreclosure.

Last updated: January 24, 2026
Reviewed by: Quilia Legal Content Team

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