Definition
Bankruptcy is a legal process that provides protection from creditors and resolution of indebtedness for an individual or business that is insolvent.
Analysis
The purpose of bankruptcy is to protect the borrower from adverse legal action, such as a judgment in order to determine how to remedy the insolvency. Some borrowers need help reorganizing and can partially repay their debt over time. Other borrowers call it quits so that they can have a fresh start.
The U.S. Bankruptcy Code describes six forms of bankruptcy:
- Chapter 7: liquidation of assets to repay debt (individuals and businesses)
- Chapter 9: municipal bankruptcy
- Chapter 11: reorganization (businesses and individuals with high assets)
- Chapter 12: rehabilitation (fishermen, family farmers)
- Chapter 13: rehabilitation (individuals), sometimes called wage earner’s petition
- Chapter 15: international filings
Bankruptcy is designed to help debtors discharge many types of consumer debt. It does not allow for the disposition of certain debts, such as student loans, alimony, child support or most tax debt.
The U.S. Bankruptcy Code was amended with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
