What is Bankruptcy?

Bankruptcy is the legal process by which individuals and businesses who owe more debt than they can pay to solve that problem by either working out a plan to repay some or all of the debt over time, or having some of their debts canceled (“discharged”). 

The right to file bankruptcy is written into the United States Constitution.  In other words, the right to file a bankruptcy is a constitutional right.  Indeed, several signers of the Declaration of Independence and the U.S. Constitution filed bankruptcy, including Thomas Jefferson.  The purpose of the Bankruptcy Code is to give debtors a chance to start over.

Bankruptcy takes place under the authority and supervision of the United States Bankruptcy Courts. These are federal courts. The United States Bankruptcy Court for the state of Colorado is located in downtown Denver.

In bankruptcy, the person, corporation or partnership that owes debt is called the debtor.

During the bankruptcy case, the debtor’s assets may be liquidated (sold) and the money used to pay some or all of the creditors.  In bankruptcy, the debtor must either (1) surrender his or her non-exempt (protected) property for liquidation and distribution to creditors, or (2) develop a plan providing creditors with at least as much money as they would receive if the debtor’s assets were liquidated.

Due to these rules, a debtor must make full and complete disclosure of all assets, liabilities (creditors) and other financial information, including income.

The laws and rules that govern the bankruptcy process are in the Bankruptcy Code.  The Bankruptcy Code is a federal law.  It is found in Title 11 of the United States Code.  The Code has several chapters.  The most commonly used chapters are Chapter 7, Chapter 11 and Chapter 13.  Each of these chapters offer debtors a different set of options for dealing with their debts.