A creditor can take a debtor to court for default. As in any court proceeding, the defendant (that is, the debtor) must be notified in advance. The defendant can present his or her case at the hearing.
Some of the oldest forms of credit protection legislation are the federal bankruptcy laws. These laws allow debtors who are unable to pay their debts as they come due to hold off their creditors. They can either write off or repay their debts under court supervision.
There are two types of bankruptcy petitions, Chapter 7 and Chapter 13, for individuals. Chapter 7 is known as straight bankruptcy. In a Chapter 7, the debtor declares that he or she cannot pay his or her debts as they come due. If this declaration is accepted by the court, most unsecured debts such as credit cards are canceled. Also, debtors generally must surrender some unsecured assets to the court, which are sold and the sale proceeds used to pay creditors. On the other hand, certain debts such as taxes and student loans cannot be canceled.
Recent changes in federal bankruptcy laws have made filing a Chapter 13 more attractive. It is now easier for the debtor to keep a home and certain other assets. Under Chapter 7 bankruptcy, however, it is now harder for a debtor to avoid certain payments, including alimony and child support and bills for luxury goods bought before the bankruptcy petition was filed. It has become less attractive.