As far back as colonial times, every citizen has a constitutional right to file for bankruptcy. By declaring bankruptcy, one is relieved of mandatory collection activities for debts existing at the time of filing by a legal "stay" on these activities. The first version of US bankruptcy or Federal Insolvency laws appeared in 1800, and has been evolving ever since.

Chapter 7 or "straight liquidation" bankruptcy permits the retention of exempt assets and property and can be used by individuals, partnership businesses and corporations. Under Chapter 7, recent tax obligations, debts to government units and alimony/child support are not exempt. In case of debts incurred during a marriage, both spouses must file for bankruptcy otherwise the debts are transferred to the non-filing spouse.

Chapter 13, or "wage earner reorganization" bankruptcy can only be filed by individuals who have a steady source of income. It can be filed by debtors with unsecured debts that do not exceed $100,000 and secured debts that do not exceed $350,000. Basically, filing for Chapter 13 bankruptcy indicates an intention and willingness to make good ones debts within five years. With this understanding, the applicants existing assets are not liquidated.

Chapter 11 is a more flexible version of Chapter 13 available to individuals and businesses. It is generally not preferred by individuals, because it entails greater court-related expenses and calls for frequent personal appearances in court.

Once Chapter 7 bankruptcy has been legally sanctioned, creditors have no claim on future income. If assets have been concealed, misrepresented or surreptitiously transferred at the time of filing for bankruptcy, the discharge from debts can be either refused or declared null and void.