10 Pieces of Bankruptcy Information Everyone Should Know

Bankruptcy Is a Legal Process for Settling Debts
Giuseppe 'Joe' Giudice (L) and wife Teresa Giudice (of 'The Real Housewives of New Jersey') leave court after facing charges of defrauding lenders, as well as allegedly hiding assets and income during a bankruptcy case in 2013. Mike Coppola/Getty Images

Let's start with some important definitions and distinctions. Declaring bankruptcy doesn't necessarily mean that you're broke. You could have millions of dollars in the bank and a well-paying job and still go bankrupt. Bankruptcy isn't a financial state, like "rich" or "poor." It means that you owe more money (debt) than you can possibly repay. Bankruptcy, by definition, is a legal process for settling debts [source: California Courts].

To explain, let's use a hypothetical example. Steve has been laid off from his job for a year. His wife's salary isn't enough to cover all of their expenses — mortgage, food, utilities, medical bills — so they've been putting everything on their credit cards. When they're no longer able to make minimum monthly payments on the cards, the collection notices started arriving. Then the phone calls from collection agents, sometimes three or four a day.

Steve and his wife owe $70,000 in credit card debt, but only have $2,000 in the bank. The only thing of real value that they own is their home, but should Steve and his family go homeless because they're in debt?

In the U.S. Constitution, Article 1, Section 8 authorizes Congress to enact "uniform Laws on the subject of Bankruptcies" [source: U.S. Courts]. It was in the Founders' best interest — and continues to be in our national interest — to offer legal relief to people unable to pay back their debts. In place of "debtor's prison" or "indentured servitude," bankruptcy offers a formal way for debtors and creditors to strike a deal.