Bankruptcy Basics

Bankruptcy is a set of legally-defined ways for individuals or businesses to settle debts without full payment, by following rules that govern their assets and financial actions for a period of time. There are two broad types, liquidation and reorganization. Under liquidation, the party in debt agrees that their eligible properties and assets can be taken and sold to pay back debt. Some types of property are exempted. Under reorganization, the party in debt retains their property, but commits to repay some portion of the debt, typically over time. While it provides relief from debt, bankruptcy has serious and long-term effects, affecting credit ratings, the cost of future borrowing, eligibility for financing and purchases, and more. Bankruptcy decisions in the US are Federal. The US Constitution authorizes Congress to establish ‘uniform Laws on the subject of Bankruptcies throughout the United States’. States are allowed to define exempt and non-exempt properties, but they do not make bankruptcy judgements.