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2 min read Educational

What is Bankruptcy?

Bankruptcy isn’t the end — it’s a reset button. Chapter 7 clears debt, Chapter 13 locks you into repayment. Both wreck credit, but give breathing room. Here’s how it works, the risks, and why it’s a last resort.
Illustration of a cracked credit card with gold chip and numbers, being struck by a judge’s gavel, with the word “Bankruptcy” on a dark background.
A shattered credit card struck by a gavel with the word “Bankruptcy” — symbolizing debt relief through the courts but at a heavy cost.

Rock Bottom Ain’t the End
Staring at a mountain of debt you can’t pay? Bankruptcy’s not a death sentence—it’s a reset button. But it comes at a cost.

What It Is
Bankruptcy is a legal process to wipe out or reorganize debt when you’re drowning. It’s for folks who can’t pay bills—think medical emergencies, job loss, or maxed-out credit cards. In 2024, 452,672 Americans filed, up 13% from 2023. Courts handle it, not your bank. You declare, they decide what you keep or lose.

The Main Flavors
Two types dominate for individuals: Chapter 7 and Chapter 13. Chapter 7 (70% of filings) liquidates your stuff—car, jewelry, maybe your house—to pay creditors, then wipes out most unsecured debts (credit cards, medical bills). Median cost: $1,800 in legal fees. Chapter 13 (27% of filings) lets you keep assets but forces a 3-5 year payment plan—think $300/month for $20,000 in debt. Both hit your credit score hard: a 200-point FICO drop, lingering 7-10 years.

How It Works
File a petition with a bankruptcy court. List all debts, assets, income. Chapter 7 takes 4-6 months; a trustee sells non-exempt stuff (your second car, not your toothbrush). Exemptions vary—Texas lets you keep your home; California caps it at $600,000. Chapter 13 builds a repayment plan based on income; you pay a trustee, they pay creditors. Either way, an automatic stay stops collections—creditors can’t touch you.

The Good
Relief. Chapter 7 clears $10,000-$100,000 in debt for most filers. Chapter 13 saves your house from foreclosure if you stick to the plan. That stay? It halts lawsuits, wage garnishments, even IRS hounding (sometimes). You get breathing room to rebuild.

The Bad
Your credit’s toast—expect 10%+ APRs on future loans. Chapter 7 means losing non-exempt assets; 1 in 5 filers lose a car. Chapter 13 traps you in years of payments—40% of plans fail. Plus, it’s public. Your boss, your ex, anyone can see it. And no, student loans and child support don’t vanish.

Real Story
Take Mike, 35, buried in $50,000 of medical debt. He files Chapter 7, loses his boat, keeps his house. Debt’s gone in six months, but his 680 FICO drops to 480. He grabs a secured card (like you read about on Phaetrix) to rebuild. Sarah, 42, with $30,000 in credit card debt, picks Chapter 13. She pays $400/month for five years, keeps her car, but misses a payment and risks default. Discipline matters.

Takeaway: Last Resort, Not First
Bankruptcy’s a lifeline, not a shortcut. Try negotiating debts or using secured cards first. If you’re in too deep, consult a lawyer—free consults exist at Nacba.org. Check your credit at AnnualCreditReport.com to know where you stand. Don’t rush in blind.

Closer
Bankruptcy clears the slate but scars your record. It’s a tool, not a cure. Choose wisely, or you’re just trading one mess for another.

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Disclaimer: This isn’t financial advice. Consult a professional before action.

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