What is bankruptcy?

Bankruptcy is a legal tool that people in financial difficulty can use to get a “fresh start”. It gives individuals or businesses the ability to discharge or restructure their debts. Bankruptcy is a process created by federal law, but the laws vary from state to state. In Texas, the main type of consumer bankruptcy is Chapter 7 bankruptcy. Chapter 7 bankruptcy enables a person to erase any unsecured debts that they cannot pay. Unsecured debts are those that are not backed by collateral, such as a car loan or a home mortgage. In Chapter 7 bankruptcy, an independent trustee is appointed to review the debtor’s assets. The trustee will sell any assets that are considered non-exempt (that cannot be protected under the law) to pay creditors. After the sale of any assets, the remaining debt is discharged and the debtor is no longer legally obligated to pay the debt. Chapter 13 bankruptcy is available to those who have disposable income to pay back some of their debt. This type of bankruptcy allows debtors to create a repayment plan over three to five years. The repayment plan is based on the debtor’s income, expenses, and ability to pay their debt. If the repayment plan is approved by the court, the debtor will pay back a portion of their debt. At the end of the repayment plan, any remaining debt is then discharged. Bankruptcy can be a valuable tool for those in financial difficulty. But because it has long-term consequences, it is important to understand the bankruptcy process and make sure it is the right option for you.

Related FAQs

Does filing for bankruptcy stop foreclosure proceedings?
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Are there any debts that cannot be discharged in bankruptcy?
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What types of debt can be discharged through bankruptcy?
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What is bankruptcy?

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