Born to an American mother and Iranian father in New York, Bakhtiar grew up in Los Angeles and Washington, D.C., as a Catholic. At the age of 24, moved to Iran with her Iranian husband, an architect, and their three children, where she began to study Islam under her teacher and mentor, Dr. Seyyed Hossein Nasr at Tehran University, studying Quranic Arabic, eventually converting in 1964. She divorced her husband in 1976 and returned to the U.S. in 1988. holds a BA in History from Chatham College in Pennsylvania, an MA in Philosophy, an MA in Counseling Psychology and a Ph.D. in Educational Foundations. She is also a Nationally Certified Counselor.. As of 2007 Bakhtiar lives in Chicago, where she is president of the Institute of Traditional Psychology and Scholar-in Residence at Kazi Publications.

She has translated and written a combination of 25 books about Islam, many dealing with Sufism. She has also authored or co-authored a number of biographical works. Her recent translation of the Qur'an, The Sublime Quran, is the first English translation by a female translator. Her translation attempts to take a female perspective, and to admit alternative meanings to many Arabic terms that are ambiguous or whose meaning scholars have had to guess because of the antiquity of the language. Qur'an—her translation of the Qur'an was the first ever by an American woman. Her work specifically seeks to bridge understanding between non-Muslims and Muslims.

Her ability to translate Arabic accurately has been criticized by conservative scholars who claim that she neither knows modern Arabic nor speaks Arabic as a first language. Khaled Abou El Fadl, Islamic law professor from UCLA, says she is qualified as an editor, not an Islamic scholar and that three years of Classical Arabic is not enough. He also criticized the extent she relies on Arabic to English dictionaries.

Bakhtiar disagrees with such criticism saying, "The criticism is [there] because I'm a woman." She also says that some other well-known translators were not considered Islamic scholars.

Her translations of some common words are thought-provoking. She translates k?fir?n as "those who are ungrateful" instead of the common translations "unbelievers" or "infidels." She also translates the Arabic word ?araba in Chapter 4, Verse 34, concerning treatment of a husband towards a rebellious (not islamic) wife, as "go away" instead of the common "beat" or "hit." The English words "God" and "Mary" are used instead of the Arabic All?h and Maryam. Bakhtiar believes these translations will not push non-Muslims away from Islam.

Bakhtiar has stopped wearing the hijab, the head covering worn by many Muslim women, because she thinks that in America it does not promote its goal of modesty but attracts too much attention.