Last Updated on February 16, 2024 by Saira Farman

Bankruptcy may be defined as a legal process that occurs when a person isn’t financially incapable of repaying their debts or settling them. This process is often initiated by the debtor themself. For example, if a person has accumulated a lot of debts over time and is struggling with repayments, or suddenly does not have a steady source of income then it may become difficult to finance or settle those debts. Instead of having to deal with extra charges and interests accumulating from different creditors, a solution may be filing for bankruptcy. Anyone can file for bankruptcy if they decide their finances can no longer take care of their debts and liabilities.


After an individual makes the decision to file for bankruptcy, after evaluating all their available options and deciding it is the best route to take.

Then the court proceedings will begin. The court reserves the right to decide whether or not the debts are discharged and the extent to which the debts may be discharged. Also, in some cases, the court can dismiss the bankruptcy proceeding if the judge ascertains that the individual is financially capable to pay back the debts.

The main idea behind bankruptcy is to give people who are struggling financially a new and fresh start to get their life together without having the debts logging over their heads like a cloud and not for people to avoid taking responsibility for their financial decisions.


  1. Chapter 7 Bankruptcy: Liquidation
  2. Chapter 9 bankruptcy: Municipalities
  3. Chapter 11 bankruptcy: Large reorganization
  4. Chapter 12 bankruptcy: Family farmers
  5. Chapter 13 bankruptcy: Repayment plan
  6. Chapter 15 bankruptcy: Used in Foreign cases.

In  Chapter 7 bankruptcy, the focus is on liquidation or straight bankruptcy and this is the most common type of bankruptcy. While chapter 7 forgives an individual’s entire debts without any other liabilities, chapter 13 reorganizes the debts by fixing a monthly repayment plan to help the individual repay the debts, most times a substantial part of it only. The debts are paid over a period of 3-5 years. It is also important to note that this type of bankruptcy allows one to hold on to their assets. Chapter 11, does the same thing chapter 13 does but for an organization or business. Chapter 12 is peculiar to farmers and fishermen and more flexible. In chapter 15, foreign debts are addressed while chapter 9 addresses schools, districts, and how to reorganize their debts.


Chapter 7 of the United States of America primarily focuses on the liquidation of individual’s assets in order to settle the liabilities of bankrupt individuals.

The court decides a list of nonexempt assets which may be sold to recover cash to settle their debts. After the sale of all these assets, any remaining debt or liability is discharged on their behalf to give them a fresh start.

To qualify for Chapter 7 bankruptcy,

  1. You must be an individual
  2. You must not have been discharged for chapter 7 bankruptcy in the last eight years
  3. It must be certain that they are financially incapable of settling their debts

After all, these criteria are met, then the individual files an official petition to the court, attached to copies of their statement of affairs. These forms must contain a list of all your creditors and the exact amount of debts. They may also be required to include recent details of their financial activities. The individual is also required to make a comprehensive list of all assets owned by them, without leaving any important detail out. Followed closely by a list of assets you wish to exempt from the proceedings.  It is important that sending an inaccurate schedule or statement of affairs puts the individual at the risk of not getting a discharge as it is assumed that they are not upfront about seeking help with their debts. Immediately an individual files bankruptcy, all their creditors must cease all acts aimed at trying to recover their debts until the court appoints a trustee.

The court then appoints a bankruptcy trustee who will be in charge of the sale of assets and settling of debts. Then the debts are divided and classified into secured and unsecured debts to determine the priority of the debts. For example, unsecured priority debts like student loans, child support may be repaid first before the secured ones in most cases.


  1. The first meeting with creditors: At this point, the debtor is required to meet with the creditors alongside the trustee. Here, all the creditors may direct their questions, reservations at the debtor and get answers to them. The trustee may also ask the debtor questions under oath including questions regarding assets and liabilities.
  2. Sale of Assets: After the first meeting, the trustee takes full control of assets that are not exempt. The trustee then goes ahead to sell these assets and the proceeds from sales settle all expenses incurred on the case and uses the remainder of the proceeds to settle as many creditors as possible according to the priority of their debts. Any income earned by the debtor post-bankruptcy proceeding solely belongs to them.
  3. Secured debts: For secured debts, the debtors may have to forgo the collateral. However, they may also choose to redeem them. The decision is solely dependent on them in this case.
  4. Education course: Before the debts are discharged, a debtor is required to take a financial course from a non-profit counseling center. This course will help the individual make better financial decisions in the future.
  5. Discharge of debts: The individual gets their debts discharged within 4-6 of the initial filing. Every other liability incurred by the individual that has not been settled will be discharged and they will no longer be liable.


Some debts are exempted and may not be discharged and still have to be financed by the debtor. They include:

  1.  Federal student loans: If the debtor is a beneficiary of a federal student loan, then the debts will not be erased even after bankruptcy.
  2. Court-ordered alimony or child support: If the debtor is obliged to pay child support as ordered by a court, then such debt may not be discharged, this also applies to alimony.
  3. All debts incurred after bankruptcy: If the debtor goes ahead to incur debts after the proceeding, all those debts will not be discharged.

It is also important to note that co-signers to all the above-listed debts may also be liable to pay the debts, in the case where the debtor is truly incapable of financing the debt.


Bankruptcy is the last resort for most individuals who have a lot of debt liabilities on their plate. This is because as much as filing for bankruptcy may assist an individual to clear their immediate debts, it also has some disadvantages like affecting their credit score and may appear on their credit report for some time. Hence, it is advised that if an individual can afford to opt for other options like debt management or debt relief, they should try that instead. Although bankruptcy provides a fresh start and gives an individual a new chance to get their finances in order, it should only be treated as the last resort it truly is.

Sources –  What Is Chapter 7 Bankruptcy?

Apart from that, if you are interested to know about Bankruptcy Myth then visit our Business category.