Bankruptcy
A federal legal process that allows individuals or businesses to eliminate or restructure debts under court supervision when unable to repay them.
Bankruptcy is a federal legal process providing relief to debtors who cannot repay their obligations. For individuals, the two primary types are Chapter 7 (liquidation, which eliminates most unsecured debts within 3–6 months) and Chapter 13 (reorganization, which creates a 3–5 year repayment plan allowing debtors to keep assets while catching up on arrears).
Not all debts are dischargeable. Student loans (in most cases), child support, alimony, recent tax debts, and debts from fraud generally survive bankruptcy and remain owed. Secured debts (mortgage, car loan) require the debtor to either reaffirm (continue paying) or surrender the collateral.
Bankruptcy stays on the credit report for 7 years (Chapter 13) or 10 years (Chapter 7). However, for someone overwhelmed by unmanageable debt, it may be the most practical path to financial recovery—stopping collection calls, lawsuits, and wage garnishments through the automatic stay.
Real-World Example
After $95,000 in medical bills from a cancer diagnosis, the family filed Chapter 7 bankruptcy, eliminating all medical debt and credit card balances and receiving a discharge in four months.