Bankruptcy is federal court process, usually though not necessary initiated by the debtor, which is intended to aid both businesses and consumers by providing them with a way to escape debt when it becomes overwhelming, either by “liquidation” or by “reorganization.” Liquidation bankruptcy (Chapter 7) is the more popular, and involves requesting that the court discharge all debts that are owed, after the sale of all non-exempt property. Reorganization (Chapter 13, when involving consumers) is when a plan for debt elimination and creditor repayment is filed with the court. In this plan, some debts must be repaid in full, while others, depending on the debtor’s disposable income, do not need to be repaid at all.

 

One of the beneficial effects of bankruptcy is the court order called an “automatic stay” that occurs when a debtor files for either type of bankruptcy. This prevents almost all creditors from taking debt-collection actions, such as wage garnishment, utility disconnection, eviction, etc, unless the court lifts the stay and allows the creditor to proceed.