Bankruptcy is the legal process for consumers or businesses to get help with their debt.
Bankruptcy starts when a person or company submits a petition to a court, which reviews their assets and debts. The court can then cancel certain debts or approve a proposed repayment plan.
The debtor (i.e., the person or company who owes money) is usually the one who starts the process, but it can also be forced by lenders in certain situations. That’s called an “involuntary bankruptcy.”
While bankruptcy can give you a second chance at getting your financial house in order, it’s a fairly extreme option and comes with some definite drawbacks.
|Helps you regain control of your finances||Hurts your credit score (and stays on your credit report for seven to ten years)|
|Could allow you to keep certain assets||Doesn’t eliminate all debt (including some student loans, taxes, and child support)|
|Can put an end to calls from bill collectors||Can make it harder for you to get loans, rent apartments, or access other services in the future|
“Student loan debt will not be discharged in bankruptcy.
It is the Velcro of all debts.“
There are different types of bankruptcy available, each of which has its own particular rules (their names come from chapters in the U.S. bankruptcy code). The most frequently used options are:
|Name||Who can use||How it works|
|Companies and people (who qualify based on income)||This is often the easiest to file, and the process is typically complete within three to six months. The debtor gives up certain assets, and the proceeds are used to pay creditors. State and federal laws dictate which assets you can keep, such as your house, car, clothes, or other personal effects.|
|Companies and people (though it’s mainly used by companies, partly because it’s more expensive)||The debtor proposes a plan to repay creditors without giving up its assets. The intent of Chapter 11 is to let financially troubled companies find a way to become profitable again while paying their debt over time.|
(aka adjustment of debts)
|Only people with debts below a certain level and with enough income to qualify||A person comes up with a plan to pay all or some debt over the course of three to five years. The debtor can keep their property, but any income above what they need to cover basic expenses usually goes toward their debt.|
Experts recommend that you try all your other options first before filing for bankruptcy. These include:
“How did you go bankrupt? Two ways. Gradually, then suddenly.“
Bankruptcy is a legal process for businesses and individuals seeking debt relief. There are various options, and depending on the type, the debtor may be able to cancel certain debts completely or come up with a repayment plan. Bankruptcy has many pros and cons, and while it can help some people rebuild their finances, it can hurt your credit score and might require giving up certain assets.