Future Business Leaders of America (FBLA) Business Law Practice Exam

Which type of bankruptcy allows individuals to discharge all their debts for a fresh start?

1. Chapter 13 bankruptcy

2. Chapter 7 bankruptcy

3. Chapter 11 bankruptcy

4. Chapter 9 bankruptcy

The correct answer is: Chapter 7 bankruptcy

Chapter 7 bankruptcy is designed for individuals seeking to eliminate most or all of their debts, allowing them to achieve a fresh start. Under this type of bankruptcy, a court appoints a trustee to oversee the liquidation of the individual's non-exempt assets to pay off creditors. Once the assets have been liquidated and debts discharged, the individual is relieved of the obligation to pay most remaining debts, leading to a complete reset financially. This is particularly beneficial for those who are overwhelmed with debt and cannot keep up with payment schedules. In contrast, Chapter 13 bankruptcy is more focused on individuals who have a steady income and wish to reorganize their debt through a repayment plan, rather than discharging it outright. Chapter 11 is primarily used by businesses to restructure their debts while they continue operations, and Chapter 9 specifically caters to municipalities undergoing financial distress and does not apply to individuals. Thus, Chapter 7 is the option that provides the most comprehensive discharge of debts for individuals seeking immediate relief.