Key Terms
Bankruptcy
A federal court proceeding in which an individual or business is relieved of most debts and undergoes court-supervised r
Core purpose
Preserve as much of the debtor's property as possible; divide it as fairly as possible between debtor and creditors.
Secondary purpose
Encourage risk-taking and entrepreneurial activity by giving debtors a path to a fresh financial start.
Critics say
Allows some businesses to escape consequences of their own mismanagement.
Debtor
The individual or business entity who owes money to others; either files the petition or has one filed against them.
Claim
The right of payment from the debtor.
Creditor
An individual, business, or governmental entity owed money by the debtor; a creditor holds a claim against the debtor.
Liquidation
Converting assets into cash to settle debts. Chapter 7 winds up all business affairs; the entity ceases to exist after c
Goal
Restructure finances; pay creditors over extended time; keep the debtor in business.
Purpose
Help individuals whose debts are small enough and income is large enough that substantial repayment is feasible; keeps m
Payment plan length
3 to 5 years (average).
DISADVANTAGE
Future income is committed to debt repayment for 3 to 5 years; limits financial flexibility for an extended period.
Bankruptcy estate
The debtor's legal and equitable interests in property at the time the bankruptcy petition is filed.
Bankruptcy discharge
Releases the debtor from monetary obligations that existed at the time the petition was filed; ends the bankruptcy case;