Bankruptcy is a way for overburdened individuals and corporations to cancel their debts and continue to operate under restrictions of state and federal laws. U.S. federal bankruptcy law allows for different bankruptcy re-structuring programs depending on the entity and its debt situation.
Filing for the various types of bankruptcy, commonly known as chapters, gains the individual or corporation a release, or discharge, from unsecured debts. Filers typically gain their discharge, which prevents debtors from trying to collect what is owed them, about four months after filing for bankruptcy, depending on which chapter they file under.
Debt and taxes
The two best-known forms of bankruptcy are Chapter 7, the most common and also called liquidation, and Chapter 11, generally used by businesses looking to discharge debts but continue operating. Chapter 12 allows filers to keep property and pay debts from future income and is usually used by family farmers, while Chapter 13 is popular with individuals who have a limited amount of unsecured and secured debt. Some forms of debt, such as alimony, student loans and some taxes and penalties, cannot be discharged under any of the four chapters.