Bankruptcy Law

Bankruptcy: How It Works, Types And Consequences

| February 10, 2021 | Last Updated on: November 2, 2023

Bankruptcy is a legal process that the federal bankruptcy court oversees. It is designed to help businesses and individuals eliminate their debt or repay their debt with legal means.

Declaring bankruptcy might help you to get away with your debt. However, you must remember that once you have declared bankruptcy, it leaves a huge dent in your credit score. Bankruptcy will remain in your credit for at least 7-10 years. This will directly affect your credit card accounts and further affect your loaning processes.

What Is Bankruptcy?

What Is Bankruptcy?

As we have already said, bankruptcy is a legal process to help individuals and businesses get away with their debts. You can say bankruptcy is usually a last resort for debt resolution because there are better ways to settle your debt.

Working with a bankruptcy lawyer can help you ensure your bankruptcy process goes smoothly and complies with all the bankruptcy proceedings’ rules and regulations.

Before you can file for bankruptcy, you need to meet certain requirements. For instance, you need to demonstrate that you can no longer repay your debt and have also completed credit counseling with a government-approved credit counselor.

If you decide to move forward with the bankruptcy proceeding, you need to decide which type of bankruptcy proceeding you want to go.

Types Of Bankruptcy

Types Of Bankruptcy

Even though the general goal of all bankruptcy is to offer a solution to your debts, not all bankruptcies are designed to do so. Here are the types of bankruptcy that you can look into.

Chapter 7: Liquidation

Chapter 7 bankruptcy is also known as liquidation bankruptcy. It is a straightforward process where financial support becomes null. Once an individual or a business declares to be bankrupt, a court proceeding occurs where all assets are put on liquidation (sale) to pay off debtors. However, unsecured debt like medical bills and credit cards are erased. 

Chapter 9: Municipalities

Chapter 9 bankruptcy is a repayment plan where cities, municipalities, and school districts reorganize and pay back what they owe. 

Chapter 11: Large Reorganization

Chapter 11 bankruptcy is directly related to businesses or corporations. Businesses come with a plan on how they will continue working while paying off their debts. If the debt is just too much to handle, the bankruptcy is then passed on to chapter 13. 

Chapter 12: Family farmers

Chapter 12 focuses on a family with farming businesses. This law helped the farmer families to avoid having to sell all their liabilities. While Chapter 12 is similar to chapter 13, it is more flexible and has higher debt limits.

Chapter 13: Repayment Plan

While the Chapter 7 bankruptcy plan forgives the debts, chapter 13 reorganizes the debts you have accrued. The court approves monthly payment plans by which you can slowly pay off your unsecured debts. The monthly payment amount depends on your monthly income.

Chapter 15: Used In Foreign Cases

Chapter 15 bankruptcy law deals with international bankruptcy issues and helps the debtors to access the US bankruptcy court.

What Are The Advantages Of Filing Bankruptcy?

Many who qualify for bankruptcy hardly enjoy the advantages of this law. However, it is certain that bankruptcy does have some perks.

  • An Automatic Stay On The Creditors: After filing for bankruptcy, the court will automatically put a stay order on the debt collector activity. This practice does not cancel your debt; however, it stops all the debt collection proceedings. 
  • Dischargeable Debts: Dischargeable debts are the debts you can cancel or discharge your responsibility for paying debts. A dischargeable debt is a debt that can be exempted by bankruptcy.
  • Bankruptcy Exemption: If there is an asset and you have exempted, you do not have to worry about that asset being included in the bankruptcy proceedings. 
  • Credit Score: If you have an unclean debt score, you can take a bankruptcy to your advantage. Once all your debts are cleared off, you can have a fresh start and build a new credit score.

How Often Can You File For Bankruptcy?

How Often Can You File For Bankruptcy?

Once you have completed all your processes and have a new start, that does not mean that you will never need its help again. There may be a time in the future where you will need help with this law. So when can you file bankruptcy again?

Once you have filed for bankruptcy, the court will deny a subsequent discharge of the same chapter for the next eight years. In simple terms, you need to wait for more than eight-year to file for it again.

What Happens When You File For Bankruptcy?

If you are struggling financially, it helps you to come up with a payment plan to pay off your debt slowly but surely—either way, declaring bankruptcy grants you an automatic stay order on all the debt collectors’ activities.

Applying for bankruptcy will not ease up your debt; instead, the federal government will help you with a step-by-step plan to pay off your debts. This process does not involve deducting money from your bank accounts or garnishes your wages.

Your current life will be taken into consideration to ensure that you have enough learning to pay off your debt.

How Long Does A Bankruptcy Stay On Your Credit Report?

Bankruptcy On Your Credit Report

It can affect your credit score for as long as it remains in your credit reports. But the impact of bankruptcy can be diminished over time. That means your crest score can begin to recover itself even if the bankruptcy remains on your credit reports.

After the bankruptcy is removed from your credit score report card, you will find that your credit score has seen a fresh start; you just have to maintain paying off your bills in full on time.


Deciding to file bankruptcy is not easy; however, if for some people, this can be the right choice. While bankruptcy might hurt your credit score for some years; however, with a proper payment plan, you can recover your credit score.

Declaring bankruptcy might not be the best thing to face, but it certainly helps you from many future debt-related problems. The earlier you can go for bankruptcy, the easier it will be for you to pay off your debts.

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Lucia Patterson
Lucia Patterson

Lucia Patterson is the woman behind TheLegalGuides, a blog solely focused on legal guides, tips, and advice. Lucia is passionate about Legal and blog TheLegalGuides in her free time.


6 Replies to “Bankruptcy: How It Works, Types And Consequences”

  1. Very nice post and right to the point. I am not sure if this is really the best place to ask but do you guys have any ideea where to hire some professional writers? Thx 🙂

  2. Hmm is anyone else experiencing problems with the images on this blog loading? I’m trying to determine if its a problem on my end or if it’s the blog. Any suggestions would be greatly appreciated.

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