Bankruptcy is a method of canceling debt, primarily that without collateral, for individuals, couples, and companies that have gone out of business. It is also a method of restructuring debt for individuals, couples and companies that continue to operate. the different forms of bankruptcy are organized into different “Chapters,” all of which have their own rules and procedures.

Chapter 7 Bankruptcy: this is called “liquidation bankruptcy.” It is primarily for an individual or couple’s consumer debt. He, she, or they can receive a “discharge,” which allows them to walk away from most unsecured debt, that is, does not have collateral. However secured debt, such as mortgages, and car loans, do not go away. Those loans must continue to be paid, or that property may be lost. Companies that file for Chapter 7 must cease to operate. The company does not receive a discharge, but the unsecured debt is effectively cancelled. Collateral may be seized and sold by the creditors, with the permission of the court.

Chapter 11: until recently, this was primarily the province of large companies and organizations, such as the Los Angeles Dodgers, Reader’s Digest, General Motors, and other such organizations. The enterprise puts forth a plan of reorganization, which is reviewed by a creditors committee, made up of the largest creditors. There is than a back and forth regarding the plan, which the court must eventually approve or disapprove. increasingly, individuals have taken advantage of Chapter 11, but it may be an expensive and very combative process.