Bankruptcy
A legal process allowing individuals or businesses to eliminate or restructure unmanageable debt.
What is Bankruptcy?
Bankruptcy is a federal legal process that provides relief to individuals and businesses unable to repay their debts. For individuals, Chapter 7 (liquidation) eliminates most unsecured debt after selling non-exempt assets — it typically takes 3–6 months and stays on a credit report for 10 years. Chapter 13 (reorganization) allows debtors to keep assets and repay debts over a 3–5 year court-approved plan, remaining on a credit report for 7 years. While bankruptcy provides a legal fresh start, it severely damages credit scores and makes future borrowing harder and more expensive.
Example
A household with $80,000 in credit card debt and a median income files Chapter 7. After passing the means test, most unsecured debt is discharged within 4 months. Their credit score drops 200+ points, but they avoid wage garnishment and collection calls.
Source: US Courts — Bankruptcy Basics