Bankruptcy may be the only solution if you find yourself piled debt with no way out. Since it is a tedious process with very serious and real consequences, understanding how bankruptcy works before following through is necessary. Also, not all debt can be cleared and filing bankruptcy will have an effect on your credit for a very very long time.
There are many types of bankruptcy. Some are designed for businesses (Chapter 11) while others are for individuals (Chapter 7, 13). Chapter 7 bankruptcy is called liquidation bankruptcy. When you file for this type of bankruptcy any unsecured debts are erased. Chapter 13 bankruptcy works differently as it allows you to recognize your debts by creating a repayment plan with lenders. When you file a Chapter 13 bankruptcy you are able to keep the things that you own so this option can be better for some individuals.
Who can claim bankruptcy?
Filing for chapter 7 or chapter 13 bankruptcy depends on a lot of factors. A chapter 7 bankruptcy can be filed by individuals and businesses and only be filed if your income is not enough to repay your debts on a payment plan. Chapter 13 bankruptcy can only be filed by individuals and be claimed if you have less than $383K in unsecured debt or less than 1.1MM in secured debt.
What happens to the debts?
Chapter 7: Most unsecured debts are eliminated and any assets that you have are sold. Assets such as clothing and cars are usually exempt from repossession. Any secured debts you have (ie: car loan or mortgage) can be exchanged for the item that is used to secure the loan or you can arrange a repayment plan.
Chapter 13: You will work with your creditors to set up a payment plan that states how much you will pay and how long it will take to pay your debts back.
And then what happens?
Bankruptcy does not provide you with a clean state even though is can help you get your finances back on track. The bankruptcy will stay on record for up to 10 years and will make getting any new credit extremely difficult. A personal financial management course is also mandatory to teach you the skills you need to manage your money.