Before the days of America, during the reign of the English King, debtors who couldn't pay their bills were sent to prison and their belongings seized. This was known as the debtors prison. Creditors got what they could from the debtor's estate, which usually amounts to nothing. Debtors then pay their debts by remaining incarcerated.
Overtime, the English law evolved into what we now call "bankruptcy law". Through over a hundred years of legal evolution, bankruptcy today does not involve going to prison--with some exceptions, such as bankruptcy fraud. Instead, today, the law leans toward consumer protection and less on creditors retribution. U.S. bankruptcy law requires bankruptcy debtors to "surrender" a certain amount of assets and prohibits creditors from trying to go after the debtor's paycheck, bank accounts, and other assets after a bankruptcy petition has been filed. Modern bankruptcy protects consumers from losing everything, while allowing creditors to recoup as much of their loss as possible. It also forces creditors to back off to allow debtors space to breath, regroup, and rebuild.
Don't waste your money paying creditors if you can't afford to...
The common myth that people will lose their home (or everything) when filing for bankruptcy is something cooked up by creditors to prevent people from filing. Further, the common myth that it will destroy one's credit was also designed to scare desperate debtors into using every penny of their life savings, retirement, and even children's college funds to try to pay back debts that they simply cannot afford to pay. As a result, many people who come to me for advice on bankruptcy have exhausted everything they own and is left with nothing but the clothes on their back and maybe their home. Before you drain your retirement account, talk to me first (or another lawyer that handles consumer debt defense)--educate yourself to save yourself.