Bankruptcy is a legal process through which individuals or businesses who are unable to repay their debts can seek relief from their creditors. Bankruptcy allows debtors to eliminate or restructure their debts and get a fresh financial start. Bankruptcy is typically initiated by the debtor filing a petition with the court, which triggers an automatic stay on collection actions by creditors.
There are several different types of bankruptcy, each with its own eligibility requirements and consequences. Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves the sale of the debtor’s non-exempt assets to repay creditors. Chapter 13 bankruptcy, also known as reorganization bankruptcy, allows debtors to keep their assets and develop a repayment plan to pay back their debts over a period of three to five years. Bankruptcy can have significant long-term impacts on a debtor’s credit score and financial stability, but it can also provide a necessary lifeline for those struggling with overwhelming debt.