Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. A declared state of bankruptcy can be requested by creditors in an effort to recoup a portion of what they are owed; however, in the overwhelming majority of cases, the bankruptcy is initiated by the bankrupt individual or organization.

Bankruptcy in the United States is a matter placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8), which allows Congress to enact "uniform laws on the subject of Bankruptcy throughout the United States." Its implementation, however, is found in statute law. The relevant statutes are incorporated within the Bankruptcy Code, located at Title 11 of the United States Code, and amplified by state law in the many places where Federal law either fails to speak or defers expressly to state law.

While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often highly dependent upon State law. State law therefore plays a major role in many bankruptcy cases, and it is often quite unwise to generalize bankruptcy issues across state lines.

Bankruptcy Chapters

There are six types of bankruptcy under the Bankruptcy Code , located at Title 11 of the United States Code :

• Chapter 7 (a liquidation-style case for individuals or businesses),
• Chapter 9 (Municipal bankruptcy)
• Chapter 11 (a more complex rehabilitation-style case used primarily by business debtors, but sometimes by individuals with substantial debts and asset).
• Chapter 12 (a payment plan or rehabilitation-style case for family farmers and fishermen), and
• Chapter 13 (a payment plan or rehabilitation-style case for individuals with a regular source of income),
• Chapter 15 (Ancillary and Other Cross-Border Cases)

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13.

Chapter 7

Chapter 7 personal bankruptcy is also known as straight bankruptcy, or liquidation bankruptcy. Under Chapter 7, debtors give up certain property that they own when they go bankrupt. The property is sold, and the proceeds are used to pay the creditors. In most cases debtors do not have any assets, and thus in most cases they do not lose anything. In most Chapter 7 cases most debts are discharged about 90 days after filing. Debts that are discharged (which means they go away) include credit card debts. Debts that are not discharged would include child support payments and some taxes and student loans. Secured debts, such as car loans and house mortgages, are also not discharged. Under the new rules implemented as a result of the 2005 Bankruptcy Reform , it is now more difficult to qualify for Chapter 7 bankruptcy. Debtors are subject to a means test, and if income exceeds limits set by the government, the debtor must file under Chapter 13.

Chapter 13

Chapter 13 personal bankruptcy is also known as a Wage Earner Plan. Under Chapter 13 the debtor keeps all of their property, but in return they make regular payments to a trustee, who distributes the payments to the creditors. Most Chapter 13 plans last for three to five years, and then the debts are discharged. Creditors will only accept a Chapter 13 plan if it provides greater realizations for them than a Chapter 7 plan.