The fundamental premise of bankruptcy law is that every overwhelmed debtor is entitled to a new start.  A variety of circumstances can leave a Debtor drowning in debt—credit cards, hospital bills, loss of job, school loans, loss of a spouse, etc.   The filing of a bankruptcy petition instantly halts all collection activity, including phone calls, letters and lawsuits, until the court has had an opportunity to review the debtors situation and request for relief. Bankruptcy law provides several options for debtor protection,  Chapter 7 and Chapter 13 being the most common for consumers.  (Businesses intending to shut down use Chapter 7, while business planning to reorganize use Chapter 11.  Businesses are not eligible for Chapter 13 protection, in any case). 

 Under Chapter 7, individuals may file petitions which, in effect, ask the Bankruptcy court to sell off their assets and pay their creditors out of the proceeds.  What usually happens, however,  is that debtors get to keep their homes and cars while getting their unsecured debt (i.e. credit cards, hospital bills, etc.) discharged.  (Homes, cars, clothes, and cash on hand, are protected as “exempt” property) up to a certain amount.   All debtors cannot get Chapter 7 protection, however.  Debtors  whose disposable income is above average may be forced to file under Chapter 13, where they must  endeavor to pay back at least part of their delinquent debts under a court-approved plan.    Chapter 7 protection is also available to businesses. 

Persons who co-sign on loans for their children, friends, spouses or businesses always bear the risk that creditors will come after them if the primary Debtors do not pay.  If the primary debtor files for protection under Chapter 7,  collection activity will stop for the primary debtor, but not for the co-signer.  In other words, creditors can go around the bankruptcy proceedings and come after the co-signer personally.  By contrast, collection activity, under Chapter 13,  stops for both the primary debtor as well as the co-signer. It must be remembered, however, that only consumers, not businesses, are eligible for bankruptcy protection under Chapter 13.   It should also be noted that for co-signers as well as for primary debtors, the filing of any kind of bankruptcy will be reported to the credit bureaus for a period up to ten years.