What are the main purposes of Bankruptcy?

Bankruptcy laws serve two main purposes. First, Bankruptcy law gives creditors some payment on their debts if a debtor (the one who owes the debt) can afford to pay them. Second,  Bankruptcy law gives debtors a fresh start, by canceling many of their debts, through an order of the court called a discharge.

There are four types of Bankruptcy available to individuals:

• Chapter 7 (a liquidation-style case for individuals or businesses),
• Chapter 13 (a payment plan or rehabilitation-style case for individuals with a regular source of income),
• Chapter 12 (a payment plan or rehabilitation-style case for family farmers and fishermen), and
• Chapter 11 (a more complex rehabilitation-style case used primarily by business debtors, but sometimes by individuals with substantial debts and asset).

The two most important types of cases for consumers are chapter 7 and chapter 13. Both provide for some possible payments to creditors, a discharge for debtors and supervision by a trustee. Chapter 7 involves surrendering some of your property (at least in theory) in return for a discharge of many of your debts. The trustee sells any non-exempt property and pays your creditors. In chapter 13, you keep your property but must commit to a three- to five-year repayment plan. You then obtain a discharge of most of the debts not paid in the plan.

In both types of Bankruptcy most creditors must stop efforts to collect debts after your case is filed. This protection is called the “automatic stay.” In a chapter 7, this relief is often temporary.