How Bankruptcy Works
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The Basics
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Bankruptcy is the process in which a person declares in a legal setting that they are no longer unable to pay their bills and other debt they have accrued. Bankruptcy is a way for a person to absolve his debts and get a "fresh start." Bankruptcy does, however, come with a price. A declaration of bankruptcy will go on your credit report and stay there for seven to ten years from the date of filing. This will make it incredibly difficult to get even a credit card, let alone a big loan for something like a house or new car.
Chapter 7
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Personal bankruptcy is known as "Chapter 7" bankruptcy. Filing for bankruptcy is close to a three-month process. During this time, a person's debts are discharged, which is a fancy legal way of saying that they are no longer under any obligation from creditors or collection agencies to pay these bills. It is important to note that during bankruptcy certain personal assets you own - like cars or homes - may have to be forfeited. However, if you only own the home you are currently living in that will never be taken away from you. There are also certain types of debts that will not be wiped clean, even after a declaration of bankruptcy.
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Non-Discharged Debts
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There are a number of different types of debts that are completely unable to be discharged during bankruptcy. These are done for public policy reasons, as it would send a bad message if you were able to get out of these types of obligations simply by declaring bankruptcy. These non-discharged debts include things like supporting a spouse, child support, and anything you were legally ordered to pay in a court of law. Any criminal restitution you may have incurred and any fines you have are also not going to be wiped away with bankruptcy and will still have to be paid in full.
Other Types of Bankruptcy
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There are other types of bankruptcy. Chapter 13 bankruptcy, for example, allows a person to work out and extended repayment plan for paying back their debts based on their income level. Chapter 11 bankruptcy is the process in which a business reorganizes itself in an attempt to stay afloat while repaying its debts over an extended period of time. Chapter 12 bankruptcy allows farmers and fishermen with families to repay their debts over time.
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References
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