Simply put, bankruptcy is the process of eliminating or restructuring your debts. To “take out” a bankruptcy, a person must file a petition in the federal bankruptcy court in the district where that person lives. The laws that govern who may file bankruptcy and what type of debt elimination or restructuring they are entitled to are primarily federal laws. The laws that govern what type of property a person can keep through the bankruptcy process can be a blend of state or federal laws, depending on the state.
The right to file bankruptcy is set forth in the Constitution. That’s right, it is in the Constitution. So the next time you hear somebody say that bankruptcy is amoral or un-American or otherwise “wrong,” tell them to take their opinion to the Founding Fathers.
Bankruptcy is NOT like the debt counseling or debt consolidation programs you see advertised all over the place. Those companies frequently advertise themselves as “non-profit” as if they are somehow affiliated with the government, but they are not. What they try to do is negotiate with each of your creditors, usually only credit cards, and get you to make a single monthly payment that covers all of your credit cards. The problem, in my opinion, is that the creditors are not required to participate in the payment program and it only takes one to “opt out” of the plan and sue you to ruin the whole plan. In contrast, when you file bankruptcy to resolve the debt problems, you are under extremely powerful federal protection from your creditors, none of whom can try to come after you if they don’t like what they are getting out of your bankruptcy case (which is frequently nothing at all).