Which statement best describes what happens when people declare bankruptcy?

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When people find themselves overwhelmed by debt and unable to repay their creditors, they may consider declaring bankruptcy as a potential solution. Bankruptcy is a legal process that provides individuals or businesses with the opportunity to eliminate or restructure their debts. However, it is essential to understand what happens when someone declares bankruptcy and the implications it can have on their financial situation.

Types of Bankruptcy

There are different types of bankruptcy, but the most common ones for individuals are Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy: Also known as liquidation bankruptcy, Chapter 7 involves the sale of non-exempt assets to pay off creditors. A bankruptcy trustee is appointed to oversee the process, and the debtor’s non-exempt assets are sold to repay as much debt as possible. However, certain assets, such as a primary residence, may be protected under state-specific exemptions.

Chapter 13 bankruptcy: Unlike Chapter 7, Chapter 13 bankruptcy allows individuals with a regular income to create a repayment plan to pay off their debts over a period of three to five years. The debtor submits a proposed plan to the bankruptcy court, and if approved, they make regular payments to a trustee who distributes the funds to creditors.

Automatic Stay

One significant benefit of declaring bankruptcy is the automatic stay. When someone files for bankruptcy, an automatic stay is put into effect, which prohibits creditors from taking any collection actions against the debtor. This means that creditors cannot continue with lawsuits, wage garnishments, or even contact the debtor to collect debts. The automatic stay provides immediate relief and allows the debtor to focus on their bankruptcy proceedings.

Bankruptcy Proceedings

After filing for bankruptcy, the debtor is required to attend a meeting of creditors, also known as a 341 meeting. During this meeting, the debtor, their attorney, the bankruptcy trustee, and any creditors who choose to attend will discuss the debtor’s financial situation. The trustee may ask questions to ensure the accuracy of the bankruptcy petition and schedules.

Discharge of Debts

The ultimate goal of bankruptcy is to obtain a discharge of debts. A discharge is a court order that releases the debtor from personal liability for certain types of debts, meaning they are no longer legally obligated to repay those debts. However, not all debts are dischargeable. For example, student loans, child support, alimony, and certain tax debts are generally not dischargeable in bankruptcy.

In Chapter 7 bankruptcy, a discharge is typically granted a few months after filing, while in Chapter 13, it occurs after the successful completion of the repayment plan. It is important to note that a discharge does not eliminate liens on secured debts, such as mortgages or car loans. The creditor still has the right to repossess the collateral if the debtor fails to make payments.

Impact on Credit and Future Financial Matters

Declaring bankruptcy has a significant impact on an individual’s credit score and financial future. A bankruptcy filing will remain on the individual’s credit report for several years, making it challenging to obtain credit or loans at favorable terms. It may also affect employment prospects, as some employers consider credit history during the hiring process.

However, bankruptcy provides an opportunity for a fresh start. It allows individuals to rebuild their credit over time by demonstrating responsible financial behavior. By making timely payments on any remaining debts and managing credit responsibly, individuals can gradually improve their credit score.


In summary, when people declare bankruptcy, they initiate a legal process that aims to resolve their overwhelming debts. The type of bankruptcy filed determines the specific procedures and outcomes. Bankruptcy provides relief through the automatic stay, allows for the liquidation or restructuring of debts, and ultimately aims to discharge certain debts. However, it is important to consider the long-term impact on credit and future financial matters.


– United States Courts: www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
– Investopedia: www.investopedia.com/terms/b/bankruptcy.asp
– Legal Information Institute: www.law.cornell.edu/wex/bankruptcy