Function

• Bankruptcy is the legal process for the elimination or restructure of debt. Any person or company can file for bankruptcy, and in the bankruptcy proceedings, the court refers to this party as the debtor. Filing for bankruptcy can have different functions: the elimination of the responsibility for paying debts or the restructure of debts for repayment. Which of the two conditions applies depends upon the specific situation of the individual or company.
  
  

Types of Petitions

• The federal judicial system allows for two types of petition, which relate directly to the debtor. A voluntary petition is when the debtor decides to file for bankruptcy because his economic situation is too extreme and he does not have the resources to repay his debts. An involuntary petition is a petition that a creditor or group of creditors files on behalf of the debtor. In this situation, creditors decide that a specific debtor is no longer complying with his obligation of payment and that a bankruptcy filing might be the only way for them to recover a portion of what the debtor owes.
  
  

Types of Bankruptcy

• In a voluntary petition, the federal government provides several chapters for which a debtor can choose to file. The most common chapters are Chapter 7, Chapter 11 and Chapter 13. Chapter 7 is sometimes called debt liquidation. People call it this because, if approved, the debtor is no longer responsible for payment of the debts discharged by the court. Chapter 13 is a restructuring of debts in such a way that the debtor has the opportunity to repay them without higher interest rates after a certain amount of time called a "recovery period." Chapter 11 is very similar to Chapter 13, but it is mostly used by corporations, with the intention of restructuring their debts in such a way that they are able to repay creditors and keep running as a company.
  
  

Eligibility

• Even though a debtor can file a voluntary bankruptcy petition to receive relief from his debts, not every debtor qualifies for filing. Each chapter has specific requirements that specify who can or cannot file. Generally, when the debtor is an individual, he needs to have received credit counseling from an approved agency within 180 days before he submitting his petition. Also, depending of the chapter, a debtor cannot file if he has filed for bankruptcy in the recent past. For example, a debtor cannot refile for Chapter 7 if he has filed for bankruptcy in the last eight years. Also, for Chapter 7, a debtor must pass the means test -- a debtor does not qualify to file if his income is higher than the average income of his state.
  
  

Results

• Depending upon the chapter a debtor has decided to file (if he is eligible), he will encounter different results. If he files for Chapter 7 and his petition is approved, the court sells most of his assets and property to pay off his creditors (or at least part of them). In a Chapter 13, the debtor has to restructure his financial situation and apply a plan of repayment to his creditors. The same happens with Chapter 11 -- the debtor repays his creditors after a period of time to restructure and recover. In all of these cases, the bankruptcy has a negative effect on the debtor's credit score for seven to 10 years, depending upon the filing. In all of these cases, though, the debtor receives temporary or permanent relief from his debts, which gives him a chance to recover economically.