Debt is a slippery slope that can cause a great deal of emotional and financial stress. It can affect sleep, productivity, and family relationships. The good news is that bankruptcy can help people who don't have the ability to pay their debts.

Bankruptcy helps people get a fresh start by creating a reasonable repayment plan, by liquidating assets to pay off debts, or by erasing certain types of unsecured debt.

Individual and Business Bankruptcy

Bankruptcy cases are normally begun when the debtor files a bankruptcy petition with their local bankruptcy court. Bankruptcy petitions can be filed individually, by spouses together, or they can be filed by a corporation or other business entity.

All bankruptcies are handled in the federal courts, under the provisions of the U.S. Bankruptcy Code.

While there are different kinds of bankruptcies; the three most commonly filed bankruptcies are:

• Chapter 7 – for individuals and married couples.
• Chapter 13 – for individuals and married couples.
• Chapter 7 or Chapter 11 – businesses may choose a Chapter 7 to liquidate, or they may file a Chapter 11 to organize.

Chapter 7 and Chapter 13: Individual Bankruptcies

Chapter 7 is known as the "liquidation" bankruptcy where the bankruptcy trustee liquidates the debtor's nonexempt assets to pay off debt. However, many debtors don't have assets to liquidate – these are called "no asset" bankruptcies.

In these cases, often the debtor is able to wipe out a significant amount of unsecured debts such as credit card debt, while not losing anything.

To qualify for a Chapter 7, you must pass the bankruptcy "means" test, meaning your income must be low enough to qualify. If you earn too much, you'll be diverted to filing a Chapter 13 instead. Under a Chapter 13, you pay off all or a portion of your debts over a period of 3 to 5 years.

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