What Is Bankruptcy? Definition, Types and What to Know

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Key takeaways
- Bankruptcy is a legal tool to help consumers and businesses resolve overwhelming debt. It’s a complicated process that’s best taken on with the assistance of an attorney.
- Chapter 7 and Chapter 13 are the two most common types of bankruptcy for consumers, while Chapter 11 is typically used for businesses.
- Bankruptcy may make sense if your total non-mortgage debt exceeds 40% of your income and your path to pay it down is unclear.
- Filing for bankruptcy can negatively impact your credit score and will stay on your credit report for seven to 10 years. However, you can begin to restore your score in as little as a few months.
- There are alternative debt relief options to consider, like a debt management plan.
What is bankruptcy?
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Learn more about our debt relief partners belowIs filing for bankruptcy right for you?
- You see no way to pay off your debts within five years.
- Your amount of debt (excluding a mortgage) is greater than 40% of your income.
- You’re paying as much as you can toward your debts but not making progress.
- Debt payments are preventing you from meeting other financial goals, such as saving for retirement.
What are the types of bankruptcy?
Chapter 7 bankruptcy
- You must pass the means test, which determines whether you qualify to file Chapter 7.
- Cannot have had a Chapter 7 discharge in the past eight years or a Chapter 13 discharge in the past six years.
- Cannot have filed a bankruptcy petition in the previous 180 days that was dismissed because you failed to appear in court or comply with court orders, or you voluntarily dismissed your own filing because creditors sought court relief to recover property they had a lien on.
Chapter 13 bankruptcy
- You must have regular income.
- Must be current on tax filings.
- You cannot have filed for Chapter 13 in the past two years or Chapter 7 in the past four years.
- You cannot have filed a bankruptcy petition in the previous 180 days that was dismissed for certain reasons, such as failing to appear in court or comply with court orders.
Chapter 11 bankruptcy
- Cannot have filed a bankruptcy petition in the previous 180 days that was dismissed because you failed to appear in court or comply with court orders, or you voluntarily dismissed your own filing because creditors sought court relief to recover property they had a lien on.