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Bankruptcy is a legal process designed to help people or businesses who can't pay their bills. It's a way of getting a fresh start financially. In the United States, there are two main types of bankruptcy: Chapter 7 and Chapter 13. Each type of bankruptcy has different rules and requirements.

What is bankruptcy?

Have you ever heard the term "bankruptcy" and wondered what it means? Bankruptcy is a situation where a person or a company is unable to pay back the money they owe to others, so they ask the court for help in finding a solution. This can involve making a plan to pay off their debts over time, or selling their belongings to get money to pay back those they owe. There are different reasons why someone might go bankrupt, and it can have a big impact on their life.
In this article, we will explore some common causes of bankruptcy and the two main types, Chapter 7 and Chapter 13.
judge gavel resting on a pile of money
Bankruptcy is a court process that helps people and companies figure out how to handle their unpaid debts.

What causes bankruptcy?

There are many reasons why people end up filing for bankruptcy. For some, it is due to overspending or money mismanagement. They may have taken on too much credit card debt or have too many loans. In this case, a long period of poor credit management ultimately results in bankruptcy.
But for others, bankruptcy may be the result of things they can't control.

Medical expenses

Medical expenses are often the most common reason people file for bankruptcy. If you don't have medical insurance, a serious health issue or emergency could leave you with thousands of dollars in medical bills. It can be tough to pay off these bills, especially if you don't have a high-paying job or if you have other debts.

Job loss

Job loss is another common reason for bankruptcy. If you lose your job and don't have any savings, you may not be able to pay your bills, including your rent or mortgage. This can quickly lead to debt and, eventually, bankruptcy.


Divorce can also be a major factor in bankruptcy. When a couple files for a divorce, their income is often divided in half, but their expenses usually stay the same or even increase. This can be a financial shock for some people, and they might not be able to keep up with their bills.

Failed business

Finally, a failed business can lead to bankruptcy. If you start a business and it doesn't go as planned, you could end up with a lot of debt. Many small business owners invest all of their own money into their business, so if it fails, they may not have any other option but to file for bankruptcy.

What are bankruptcy chapters?

In the United States, there are two main types of bankruptcy that people use: Chapter 7 and Chapter 13. Let's look at these two chapters to see how they work.

Chapter 7: A clean slate

Chapter 7 bankruptcy is also called "liquidation" because it involves selling some of your belongings to pay off your debt. When you file for Chapter 7, a court will look at your income, your expenses, and your assets (the things you own). If you qualify, the court will appoint a trustee who will sell your non-exempt assets (like jewelry or a second home) to pay back your creditors (the people you owe money to).
After this process is done, most of your remaining debt will be wiped away, and you'll have a fresh start. There are some debts that cannot be erased, like student loans, child support, and taxes. Chapter 7 can be a good option if you don't have a lot of assets or if your income is low.

Chapter 13: A repayment plan

Chapter 13 bankruptcy is also known as a reorganization, or a "wage earner's plan" because it's designed for people who have a regular income but are struggling to pay their debts. Instead of wiping away your debt like Chapter 7, Chapter 13 helps you create a plan to repay some or all of your debt over a period of 3 to 5 years.
To qualify for Chapter 13, you must have a regular income and your total debt must be below certain limits for unsecured debts (like credit cards) and secured debts (like a mortgage).
When you file for Chapter 13, you'll work with the court to create a repayment plan that fits your budget. This plan will help you pay off your debt in smaller, more manageable amounts. At the end of the repayment period, any remaining debt may be forgiven.

Comparing Chapter 7 and Chapter 13

There are some key differences between Chapter 7 and Chapter 13 bankruptcy.

1. Time

Chapter 7 bankruptcy is typically faster, taking about three to six months to complete. Chapter 13 bankruptcy requires a three- to five-year repayment plan.

2. Property

In Chapter 7, you may have to sell some of your assets to repay your debts. In Chapter 13, you can keep your property as long as you stick to the repayment plan.

3. Eligibility

Not everyone is eligible for Chapter 7 bankruptcy. You must pass a "means test" that looks at your income and expenses. Chapter 13 bankruptcy is available to those with a regular income who can afford to repay some of their debts.

4. Credit report

Chapter 7 bankruptcy remains on your credit report for ten years, while Chapter 13 remains for seven years.


In conclusion, bankruptcy is a serious decision that should only be considered as a last resort. Filing for bankruptcy can have long-lasting consequences for your financial future, especially your credit score and credit report. Your credit score will plummet and your credit report will list a bankruptcy filing, both of which will make it harder to get loans or credit cards for a long period of time.
It is important to weigh all your options carefully and seek professional advice before choosing this path. Remember, there may be other ways to manage your debt and get back on track without having to declare bankruptcy.

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