Bankruptcy (definition)
Bankruptcy
Bankruptcy is a legally declared inability of an individual or organization to pay their creditors. Bankruptcy can be initiated by the borrower or by the lender. When bankruptcy is declared, most of the debtor's assets will be distributed amongst the creditors. However some assets (for example a home) are sometimes retained by the debtor. The act of declaring bankruptcy protects the individual from being harassed by his or her creditors, but is a black mark on his or her credit score for many years.
For individuals, the most common types of bankruptcy filings, under the U.S. Federal Bankruptcy Code, are Chapter 7 (Liquidation) and Chapter 13 (Adjustment of Debts of an Individual with Regular Income).
A debtor filing Chapter 7 bankruptcy is basically starting over, hoping for a clean financial slate. In Chapter 7, someone (an administrator or trustee) is given the responsibility to sell the debtor's assets. Federal and state laws allow for certain exemptions, such as a primary residence and personal items such as clothing, etc. Once the assets are liquidated, creditors receive their share of the proceeds. Some debts are "forgiven", some not. If someone has filed for Chapter 7 bankruptcy once, they cannot file again for at least seven years.
Chapter 13 bankruptcy is available in certain situations, and has an advantage in that the debtor gets to keep his or her assets. A trustee is appointed to negotiate a repayment plan with the creditors, and if agreeable, the bankruptcy court makes a determination as to whether it is acceptable. Often when filing Chapter 13 bankruptcy, the debtor is able to negotiate a payment of 30 to 50 cents on the dollar owed.
When determining whether bankruptcy is a consideration for your personal situation, keep in mind that some debt is nondischargeable, in other words it cannot be erased by filing bankruptcy. Some examples (not a complete list) of nondischargeable debts are: alimony and child support, most income tax debts, many student loans, and debts for personal injury or death caused by drunk driving.
Declaring bankruptcy sounds like a good way to run away from debt, but it should not be taken lightly. It will have a negative impact on your credit history for many years, and will obviously affect your ability to obtain loans of any type in the future. You should first determine if perhaps debt consolidation or debt negotiation might be a better choice.