The main purpose of bankruptcy is to give a debtor a sort of fresh start by relieving him of most of his debts or to pay back his creditors what he can, though he might not be able to pay back everything. It usually allows people to be relieved of their legal obligation to repay most of their debts by submitting any non-exempt assets to a bankruptcy court so that the court can then distribute those assets among the accounts that are still owed money.



There are two forms declaring yourself bankrupt. The first kind is liquidation in which all of the person's non-exempt assets are sold off in an attempt to settle debts with creditors. All of the other forms fall under the reorganization category, which is when the person or company is given an opportunity to restructure his or their assets and debts to better pay everything off. Typically creditors take a portion of the person's income. Many businesses enter into reorganization to stay in an operating capacity.

In the United States, bankruptcies are under Federal jurisdiction by the Constitution as declared in article one, section eight of the Constitution. This article states that Congress can enact “uniform laws on the subject of bankruptcies throughout the United States.” The implementation of these laws, however, is found in statute law. These statutes are incorporated into the Bankruptcy Code which is found at Title Eleven of the United States Code and then is subject to state law in instances that the federal law is not sufficient to cover the circumstances of an individual's case.

The United States requires all bankruptcy cases to be filed in the United States Bankruptcy Court, which is adjacent to the United States District Courts. These cases are very dependent upon individual state laws, especially when dealing with exemptions and claims. Because these cases are so dependent upon state law, bankruptcy is not usually recognized in more than one state at a time.

The United States has six types of bankruptcy:

Chapter Seven: liquidation for businesses and individuals

Chapter Nine: municipal

Chapter Eleven: reorganization and rehabilitation, usually used by businesses though it can also be used by individuals.

Chapter Twelve: rehabilitation for fishermen and farmers

Chapter Thirteen: rehabilitation that comes with a payment plan for people who have a regular income source

Chapter Fifteen: for international and ancillary cases.

The most common chapters to be filed are chapter seven and chapter thirteen, and chapter thirteen is favorable to chapter seven in that an individual can keep his assets but is required to devote some of his income to the repayment of his debt, which is spread out over a period of three to five years. There are some who believe that bankruptcy does not actually benefit individuals and that credit counseling is better.