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Bankruptcy
Definition
Bankruptcy is a legal process that helps individuals or businesses unable to repay their debts get a fresh start by discharging or restructuring obligations.
Explanation
Chapter 7 bankruptcy liquidates assets to pay creditors and discharges most remaining debts. Chapter 13 creates a 3-5 year repayment plan. Both severely impact credit scores (200+ point drop) and remain on credit reports for 7-10 years.
Bankruptcy is a last resort. Exhaust all other options first. Some debts (student loans, taxes, child support) are generally not dischargeable in bankruptcy.
Example
Filing Chapter 7 bankruptcy may discharge $30,000 in credit card debt but requires giving up non-exempt assets and damages credit for a decade.