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Bankruptcy Introduction

Bankruptcy is a legal proceeding designed to protect consumers from creditors. It lets consumers reorganize or eliminate their debt. Because federal law provides the right to file bankruptcy, cases are handled in federal court.

What Bankruptcy Can Do

If you are indebt and your finances are out of control, filing for bankruptcy may benefit you. Filing for bankruptcy should keep creditors from harassing you. Once you file, your creditors may no longer contact you about your debts. They cannot garnish your wages or bank accounts or take your property to satisfy debts, even if they already have a judgment against you. Bankruptcy can also help you catch up on missed payments and fees, stop the repossession of your car, and prevent the foreclosure of your home. In some cases, bankruptcy can even help you get your car back after it has been repossessed.

What Bankruptcy Cannot Do

Bankruptcy will not eliminate child support, alimony, or criminal fines. In most cases, it does not affect taxes or student loans. Bankruptcy does not apply to debt incurred after the bankruptcy is filed. Bankruptcy does not remove your debts from your credit history.


Secured Creditor: A creditor who has collateral for the loan or a lien on the item you purchased using the money from the loan—this usually means you signed a contract giving them the right to take the collateral if you do not pay for it (common examples are car loans and home mortgages)

Unsecured Creditor: An individual or institution that lends money without obtaining specified assets as collateral—this poses higher risk to the creditor because they have nothing to fall back on if the borrower defaults on the loan (a common example is a credit card company)

Reaffirmation: Voluntarily reaffirming a debt to a secured creditor as a promise to repay the debt rather than discharging the debt in bankruptcy—re­affirmation agreements are normally requested by secured creditors in Chapter 7 bankruptcy and are always optional

Debtor: The individual filing bankruptcy

Discharge: The removal of the legal obliga­tion to pay a debt

Trustee: An appointed representative of the debtor’s bankruptcy estate

Bankruptcy Estate: The property interests of the debtor at the time of the bankruptcy filing