What is Bankruptcy?

Are you thinking about filing bankruptcy because you have some debt you can't handle?  Make sure you know what you are getting into first.  If you want to know the answer to, "What is bankruptcy?" learn the basics and find out below.

Defining Bankruptcy

Bankruptcy is defined to help businesses or individuals who cannot repay their debts.  They are able to either reorganize their debt or liquidate their assets and have their debt discharged.

Businesses and corporations must declare chapter 11 bankruptcy.  Their debts will be taken over by a trustee and they will owe the trustee in payments.  They will not have their assets liquidated, and they will be able to carry on business as usual.  It makes sense that they should be able to retain their property and run their business or else they wouldn't be able to pay back their debts.

You don't have to own a business in order to be able to declare bankruptcy.  As an individual with debt, you can either declare chapter 7 or chapter 13 bankruptcy.

Chapter 7 bankruptcy is for liquidation.  You will submit a petition to the federal courts and be appointed a trustee.  The trustee will liquidate all of your non-exempt assets and use that money to pay back your creditors.  Any remaining non-exempt debt will be discharged.  Debts such as student loans, child support, etc. cannot be discharged.

This is probably what most people think of when they hear the term bankruptcy.  They build up a lot of debt and think they can fix it all and start over completely by getting all their debt erased.  This is not always the case, and in fact, chapter 7 bankruptcy is harder to declare these days.

Chapter 13 bankruptcy is now more common than it was before among individuals.  Chapter 13 is the reorganization of debt.  This means that you start out with the same basic petition to the federal courts and are appointed a trustee.

Then, instead of the trustee liquidating your non-exempt assets, you get to keep all your property and assets.  They then take over your debts and pay the creditors and you are left to make payments to the trustee.  In this case, you must still pay the debts, you are just given a lot of help with it.  For example, owing a trustee means you don't have extremely high interest rates piling up more and more debt at the speed of light.

Bankruptcy was designed to help you.  If you have debts that you can't pay, it will make them disappear or make them easier to manage.  Unfortunately, bankruptcy isn't all good.  As you probably no, it is often looked upon as a bad thing.  That is because of what it will do to you afterwards.

For ten years after you've declared, bankruptcy will remain on your record.  This will make it exceedingly hard to get a loan.  For the first couple of years, you can pretty much forget about getting credit or a loan.  After a while of consistent work towards repairing your credit, it may be possible before the ten years are up.

Should you File for Bankruptcy?

Bankruptcy is not for everyone.  Many of the people who file are simply irresponsible with their money and got themselves in a mess.  I know a few people who were this way and declared bankruptcy, and now their on the verge of it again.  If you can't get yourself straightened out, you need more than bankruptcy.

The important thing is that you think about it before you jump into it and that you find out why you are in the situation you are in.  You need to find out what happened so that you can avoid those same mistakes again.