What is bankruptcy?

Bankruptcy is a legal proceeding in which a person who can not pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided to us by the United States  Constitution, Article 1, Section 8. Congress writes the laws and the federal court system handles all the cases.

The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:

[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.

Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts. 

What can bankruptcy do?

  1.  Immediately stop all of your creditors from seeking to collect  from you, until your debts are sorted out according to  law.
  2. Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start. 
  3. Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. 
  4. Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed. 
  5. Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt. 
  6. Restore or prevent termination of utility service. 
  7. Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

Another benefit of filing bankruptcy

Many people file for bankruptcy to “clear the decks” for fresh start into the world of credit. Although it’s always hard to say exactly how soon you can reestablish your credit after bankruptcy—there is little doubt that you will be able to get back on the credit track sooner by filing for bankruptcy than by ignoring your debts. 

 
 

For answers to other questions you may have, feel free to visit the other pages listed under the "About bankruptcy" link. It's found at the top of every page on our site.