What is Bankruptcy Law?

Bankruptcy law is a specialized area of the law. As such, it has its own language.


In Chapter 7 bankruptcy, you must attend a meeting with your creditors (they are not required to come). You will be asked questions under oath and your assets will be scrutinized.

Chapter 13 allows individual debtors with regular income to propose a plan to repay creditors over three or five years. Chapter 11 enables financially distressed businesses to reorganize.


Bankruptcy law governs the process by which a debtor liquidates his or her assets and distributes them to creditors, relieving him or her of further liabilities. A bankruptcy may be voluntary or involuntary, and it may address individual debtors or corporate entities. The bankruptcy process solves a number of problems in the relationships between creditors and debtors, including providing a “fresh start” for individuals overburdened by personal debts and saving the going-concern value of firms that have run into financial distress.

Individuals who file for Chapter 7 bankruptcy surrender non-exempt property to a trustee, who liquidates it and distributes the proceeds to the debtor’s unsecured creditors. This type of bankruptcy is most often used by consumers and business owners. Individuals who wish to retain ownership of some or all of their property can use Chapter 13 bankruptcy, which permits them to structure a repayment plan to pay some debt over a period of three to five years. Some types of debt, such as spousal support and most student loans, cannot be discharged in either bankruptcy proceeding.

In addition, both voluntary and involuntary bankruptcy proceedings prohibit creditors from taking certain actions against the debtor. These include garnishing the debtor’s wages, repossessing his or her car, foreclosing on a home or cutting off utility services. Creditors are allowed to pursue other legal remedies against a debtor, however, once the bankruptcy proceedings are closed.


The Bankruptcy Clause of the United States Constitution allows Congress to “enact uniform laws on the subject of bankruptcy.” The U.S. code governing bankruptcy is called Title 11 of the United States Code, and it’s amended periodically. The Bankruptcy Reform Act of 1978, or the “Bankruptcy Code,” was a major overhaul of bankruptcy law. It established a strong Chapter 11 for business reorganization, and it also created a powerful personal bankruptcy.

Before the United States adopted the “bankruptcy code,” individual merchants who were insolvent could file for protection from creditors’ actions. Other business debtors were not protected from collection, and some even ended up in debtor’s prisons.

In the nineteenth century, economic transformations and cultural changes prompted a massive rethink of bankruptcy laws. These shifts included a separation of ownership and control over companies, the rise of industrialization, and changes in attitudes toward debt.

The new bankruptcy laws were designed to reflect the balance between the interests of creditors and debtors. Creditors can still pursue collections, even after a discharge, but debtors may retain property secured by mortgages or other loans if they are able to make payments. In addition, debtors may voluntarily agree to repay the creditors in a plan approved by the court, a procedure called reaffirmation. This is usually done when the property securing the debt is worth more than the amount owed.


Bankruptcy is a legal proceeding that offers individuals or businesses a chance to stop creditor collection and erase unsecured debts. It is primarily handled in federal courts and governed by the United States Bankruptcy Code. The most common bankruptcy proceedings are Chapter 7 individual petitions, Chapter 11 business reorganization and rehabilitation petitions and Chapter 13 wage earner’s plans.

In a Chapter 7 case, the trustee takes over all assets, reduces them to cash and distributes the proceeds to creditors according to a set priority. The debtor may keep certain assets considered exempt, such as the primary residence and tools of trade. Creditors that hold unsecured debt must file a proof of claim with the court in order to receive a distribution from the bankruptcy estate.

A successful Chapter 7 bankruptcy can erase most unsecured debts and allow the debtor to start fresh without the burden of unmanageable credit card bills, medical expenses and other unsecured debts. However, it does not eliminate all debts such as student loans and taxes, child support or alimony.

In a Chapter 11 case, the debtor devises a plan to pay back creditors over a period of 3-5 years. It is typically a more complicated process and it is recommended that the debtor retain an experienced attorney to ensure that all required paperwork is filed correctly and that the bankruptcy proceeding runs as smoothly as possible.


Bankruptcy can relieve some debt and forbid creditors from trying to collect it, but it also does significant and lasting damage to a credit report. For that reason, it should usually be considered a last resort. If you are struggling to pay your bills, it’s important to understand what bankruptcy alternatives might be available to you, so that you can make the best decision for your circumstances.

Nonbankruptcy alternatives to bankruptcy include debt settlement, debt consolidation and repayment plans. Debt settlement involves negotiating with creditors to settle your debts for less than you actually owe them. In exchange, creditors often agree to forgive the remaining debt, which is then reported as a “zero balance” on your credit report. This can be done either by yourself or with the help of a professional debt settlement company.

Many consumers turn to debt settlement companies because they promise to help them get out of debt for pennies on the dollar. These businesses collect your monthly payments, deposit them into a special savings account and then negotiate with your creditors to settle your debts for much less than you actually owe them.

Individuals who make too much money to qualify for Chapter 7 bankruptcy can file a Chapter 13 debt adjustment plan that allows them to create workable repayment plans over several years. Individuals may be able to protect some property through exemption laws provided by the federal Bankruptcy Code or the laws of their home states.