Filing for bankruptcy is a legal process that a person or business initiates when they are unable to pay their debts. By filing a petition with a bankruptcy court, the debtor seeks relief from overwhelming debt either by liquidating assets to pay creditors or by creating a court-approved repayment plan
. Bankruptcy serves two main purposes: it helps creditors recover some money owed to them, and it allows the debtor a fresh financial start by discharging or restructuring debts
. When you file, an automatic stay goes into effect, stopping creditors from collection actions like lawsuits, wage garnishment, or foreclosure during the process
. There are several types of bankruptcy, with the most common for individuals being Chapter 7 and Chapter 13:
- Chapter 7 involves liquidating non-exempt assets to pay off debts, after which most remaining qualifying debts are discharged. It is often faster but may require selling some property
- Chapter 13 allows the debtor to keep their assets but requires a repayment plan over three to five years to pay back some or all of the debts
Filing bankruptcy has significant consequences, including a long-lasting negative impact on credit scores (up to 7-10 years) and potential loss of property. It is generally considered a last resort after exploring alternatives like negotiating with creditors or loan modifications
. In summary, filing for bankruptcy means formally asking a court to help manage or eliminate debts you cannot repay, either by selling assets or restructuring payments, providing legal protection from creditors while you work through your financial difficulties
