Definition
A federal legal process that discharges most unsecured debts after a court-supervised review, giving a fresh start when debts have become unpayable. Exemptions typically protect essentials such as retirement accounts, basic household goods, and often some home and car equity. Most cases finish in a few months.
Why it matters
Bankruptcy is a legal tool built into federal law, not a moral failing: lending carries risk on both sides. Knowing how it works lets you compare it honestly against years of minimum payments that may never reach zero.
Example
Someone carrying $40,000 of credit card and medical debt on a $38,000 income files Chapter 7. Retirement savings stay protected, most unsecured balances are discharged in about four months, and rebuilding begins immediately, though the filing stays on the credit report for up to 10 years.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.