Bankruptcy

The chapters

In the US, bankruptcy is governed by the Bankruptcy Code and named by the chapter that applies. The most common:

• Chapter 7 — Liquidation. A trustee gathers and sells the debtor's non-exempt assets, distributes the proceeds to creditors, and discharges most remaining unsecured debt. For individuals, certain assets (a portion of home equity, retirement accounts, basic personal property) are protected by federal or state exemptions. Available to businesses and individuals; for businesses, Chapter 7 typically means winding down operations.
• Chapter 11 — Reorganization. Used by businesses (and occasionally high-net-worth individuals) to restructure debts while continuing to operate. Existing management usually keeps running the business as the "debtor in possession," subject to court oversight, while negotiating with creditors on a plan of reorganization. Successful Chapter 11s emerge with reduced debt; unsuccessful ones convert to Chapter 7 liquidation.
• Chapter 13 — Wage-earner reorganization. For individuals with regular income. The debtor proposes a 3–5 year repayment plan; if completed, remaining unsecured balances are discharged. Used most often when Chapter 7 isn't available (income too high) or when the debtor wants to keep specific assets (a home with significant equity, a behind-on-payments mortgage).

There are also Chapter 9 (municipalities), Chapter 12 (family farmers and fishermen), and Chapter 15 (cross-border cases).

What discharge does and doesn't cover

Bankruptcy can wipe out credit-card debt, medical bills, personal loans, and most other unsecured debt. It generally cannot discharge:

• Most student loans (only with proof of "undue hardship," a high bar)
• Recent tax debt
• Child support and alimony
• Debts incurred through fraud
• Court-ordered judgments related to drunk driving

Secured debts (mortgages, auto loans) are not discharged in the sense of keeping the asset for free. The debtor either reaffirms the debt and keeps making payments, surrenders the collateral, or has it repossessed.

Famous corporate bankruptcies

• Lehman Brothers (2008) — $691B in assets, the largest US bankruptcy ever. Pivotal moment in the global financial crisis.
• General Motors (2009) — emerged from Chapter 11 within 40 days through a structured government-supported process; current GM is technically a different legal entity from pre-2009 GM.
• Enron (2001) — accounting-fraud-driven collapse that drove the Sarbanes-Oxley Act.
• Toys R Us (2017) — Chapter 11 that converted to liquidation when a workable reorganization couldn't be reached.
• FTX (2022) — crypto exchange Chapter 11 that has been working through asset recovery and creditor distribution since.

Personal financial impact

A personal bankruptcy stays on a credit report for 7 (Chapter 13) to 10 (Chapter 7) years and severely damages credit scores. Most credit access is closed off in the first few years, and rebuilding takes time — secured cards, on-time utility payments, and slowly re-establishing a payment history. Within five years of discharge, a disciplined post-bankruptcy financial profile can support reasonable credit access; a mortgage is realistically achievable about two to four years after discharge depending on loan type.

When bankruptcy is the right choice

The decision is rarely obvious. Bankruptcy makes sense when total debts are large enough that paying them off would take many years of austerity, when income won't reasonably support the payments, or when threatened legal actions (wage garnishment, lawsuits) would otherwise be devastating. It makes less sense when debts are modest enough to repay within a few years, or when most of the debt is non-dischargeable anyway.