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A proceeding in a federal court in which a borrower who owes more than his or her assets, can relieve the debts by transferring his or her assets to a trustee. Different chapters or types of bankruptcy exist. If a person files bankruptcy, a record of the filing appears on the borrower’s credit report for up to 10 years.

Definition of Bankruptcy

Bankruptcy is a federal legal process for debtors seeking to eliminate or restructure their debts.

Types of Bankruptcy

The most common bankruptcies for consumers are Chapter 7, which allows the debtor to discharge debt by liquidating all unprotected assets, and Chapter 13, which allows debtors to keep their property and repay some or all of their debt over three to five years. At the end of that time, any remaining balances are discharged.

The U.S. Code: Title 11 lists six types of bankruptcy.

  1. Chapter 7: bankruptcy for individuals and businesses where unprotected assets are liquidated to cover debts. This is also known as straight bankruptcy;
  2. Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of municipal debts
  3. Chapter 11: corporate bankruptcy which allows a business to follow a plan of rehabilitation or reorganisation so it may continue to function while repaying debt
  4. Chapter 12: rehabilitation for family farmers and fishermen;
  5. Chapter 13: bankruptcy for individuals which allows individuals to keep their property while following a plan for rehabilitation where all or part of owed debts are repaid; also known as Wage Earner Bankruptcy
  6. Chapter 15: covers ancillary and international cases of bankruptcy so that foreign debtors to clear debts.


Not all debts can be cleared through bankruptcy. For example, federally-backed student loans, most tax debt, alimony and child support cannot be discharged through bankruptcy. Bankruptcy can’t prevent secured creditors (like mortgage lenders) from repossessing property if the borrower defaults.


Bankruptcy filings are public records and can do serious and long-lasting damage to credit scores.

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