Bankruptcy Basics
Bankruptcy is a federal court proceeding in which a debtor asks the court for relief from the debts owed to his or her creditors.
A debtor is a person who owes money, also referred to as a borrower.
A creditor is a person or business who lends money, also referred to as a lender.
Bankruptcy law is contained in the Bankruptcy Code, which is organized like a book into various chapters. The bankruptcy chapters most commonly used by individuals are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is the most common type of bankruptcy relief provided to individual debtors. It is commonly referred to as "straight bankruptcy" and it completely wipes out a debtor's personal liability for most debts. If the debtor has assets that cannot be protected with bankruptcy exemptions, those "non-exempt assets" are sold to pay off the debtor's creditors. The vast majority of debtors in Chapter 7 cases filed across the country do not lose ANY assets.
Chapter 13 bankruptcy is the second most common type of bankruptcy relief provided to individual debtors. It is commonly referred to as the "wage earner's bankruptcy" because it requires the debtor to have a steady income. In Chapter 13 bankruptcy, the debtor proposes a plan to make payments on a portion of his or her debts for a period of 3 - 5 years. After successful completion of all plan payments, any remaining liability for most debts is wiped out.