bank·rupt·cy /ˈbaNGkˌrəp(t)sē/

Bankruptcy is a legal term for when a person or business cannot repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid, while offering creditors a chance to obtain some measure of repayment based on the individual’s or business’s assets available for liquidation.

In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses a second chance to gain access to consumer credit and by providing creditors with a measure of debt repayment.

Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.

The 4 Main Types Of Bankruptcy


Commonly referred to as a “liquidation bankrupty”, Chapter 7 bankruptcy involves a court appointed trustee who MIGHT sell off all non-exempt assets held by the debtor so that the debts can be repaid to the fullest extent possible.

Individuals, corporations and partnerships are all eligible for Chapter 7 bankruptcies. The portion of the debt that can not be repaid through liquidation is discharged.

Businesses generally try to avoid Chapter 7, because it is impossible to conduct business operations. Income generated after the bankruptcy filing is not a part of the bankruptcy-the debtor can keep it.


Is the most complex bankruptcy filing and the one that most troubled businesses file (although some individuals may file it as well).

In a Chapter 11 bankruptcy filing the debtor continues to function, maintains ownership of all assets, and tries to work out a reorganization plan to pay off creditors.

In the past, a business had an almost unlimited amount of time to come up with their reorganization and payment plan. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 imposes a 120-day time limit.

If the debtor has not submitted a plan within that period, creditors can submit their own plans.


Is specifically for farm owners. The debtor still owns and controls his/her assets and works out a repayment plan with the creditors.


A way for individual to restructure the debt so that they can manage it. The debtor retains control and ownership of assets. He/She also works out a three to five-year repayment plan.

Some portion of the debt may be discharged, depending on the income of the debtor. There are also limits on the amount of debt involved.

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