Bankruptcy is a federally authorized procedure by which a debtor-an individual, corporation, or municipality- is relieved of total liability for its debts by making court-approved arrangements for their partial repayment.
The goal of modern bankruptcy is to allow the debtor to have a “fresh start,” and the creditor to be repaid. Through bankruptcy, debtors liquidate their assets or restructure their finances to fund their debts. Bankruptcy law provides that individual debtors may keep certain exempt assets, such as a home, a car, and common household goods, thus maintaining a basic standard of living while working to repay creditors. Debtors are then better able to emerge as productive members of society, although with significantly flawed credit records.
An individual who is badly in debt can file for bankruptcy either under Chapter 7 (liquidation, or straight bankruptcy), under Chapter 13 (reorganization), Chapter 12 (family farmer reorganization), or under Chapter 11 (business).