What is Debt Consolidation?
Learn how debt consolidation works to reduce interest rates and save money.
What Can Be Consolidated?
Types of high-interest debts commonly used.
What is Debt Settlement?
Often confused with, but significantly different than consolidating.
What Debts Can Be Settled?
Learn what kind of creditors that will often settle for less.
How Do Bankruptcies Work?
How Chapter 7 and Chapter 13 bankruptcies work, and the aftermath on your credit report.

Guide To Debt Help
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How Do Bankruptcies Work?

The purpose of bankruptcy is to allow a person (or a business) to absolve their debts and acquire a fresh start while repaying creditors the largest amount possible (by distributing the debtors finances and non-exempt assets). Bankruptcy legally discharges a person or business of their previous debts regardless of whether or not they were completely paid off, and also protects the debtor from being harassed by further collection attempts on these debts.

In the United States, bankruptcy is regulated under Federal jurisdiction through the Bankruptcy Code; located in Title 11 of the United States Code.

State law can intervene in certain situations, so while at the same time some generalizations can be made regarding the process - specifics might vary from state-to-state. Regardless of location however, bankruptcy cases are at all times filed in United States Bankruptcy Court. Chapters 7 and 13 are most common for individuals.

Chapter 7 Bankruptcies

Chapter 7 is frequently referred to as straight and liquidation bankruptcy. By going through a Chapter 7 a debtor will typically have to give up their assets to a trustee, which are then sold to bring in funds that are used to pay off present debts with creditors. What assets may be sold varies from state-to-state, some 'necessities' like a vehicle and primary home are exempted most times, as well as tools and equipment so one can continue working afterwards.

When an individual files a petition for bankruptcy, what is referenced as a bankruptcy estate will be created. The debtors assets (without exemptions) are moved over to this estate for liquidation. A trustee will be appointed to represent this estate and figure out the distribution to those creditors who are owed money, though theoretically the trustee will not represent either party exclusively.

Typically it takes about three months following filing a Chapter 7 before what's usually called a discharge is entered. That's a court order that forbids creditors from any additional collection attempts on non-secured debts that were owed on or before the primary Chapter 7 filing date.

Normal debts that are discharged are credit cards, medical bills, personal loans, breach of contract or liability for negligence.
Debts that are normally not included for discharge include student loans, taxes, spousal and child support, government fines and penalties.

Chapter 13 Bankruptcies

Chapter 13 bankruptcy is a government arranged debt management bankrupcy method for individuals. To be a candidate, a debtor must have secured debts that totals no more than $807,750 and unsecured debts lower than $269,750. Typically has to still be bringing in money to make this an viable alternative to Chapter 7.

Under a Chapter 13 an individual retains their assets instead of turning them over to an estate, but must submit regular payments to a trustee, who will then distribute the money to owed creditors. These methods of payment usually stretch out over three to five years, with any remaining debt discharged after that. Generally, a Chapter 13 will not be approved if the creditors would otherwise get a larger sum under a Chapter 7 arrangement.

What Happens After A Bankruptcy?