What Is Bankruptcy?

What Is Bankruptcy?

Bankruptcy is a legal process allowing individuals caught in debt to have their debts discharged. Liquidation is the most common form of bankruptcy, which allows an individual to do away with unsecured after petitioning the court for permission.

What Happens When You File for Bankruptcy

What Is Bankruptcy?

When filing for bankruptcy, it is necessary to go through the court system. A hearing will be held for the bankruptcy court to determine whether or not the petition is valid and whether or not the person filing is eligible for bankruptcy. If they are eligible, then the court will issue an order of relief; this order stops creditors from collecting money from you during your case and prevents them from taking action against any property listed on your petition (this list will generally include cars and homes).

The process can take 3-6 months, depending on how complicated your situation is and how well prepared you were before filing. If anything changes during this period that could affect whether or not you qualify for Chapter 7 (for example: if some creditors sue), then it would be wise to get updated advice from an experienced attorney before proceeding further with proceedings at court.

Types of Bankruptcy

There are various types of bankruptcy. The major types are chapter 7, Chapter 13, and Chapter 11.

  • Chapter 7 is liquidation. This type of bankruptcy allows you to keep your property (if you can afford to do so) but requires that you give up all nonexempt assets that are not protected by state or federal law. It also requires you to repay all your debts over time through monthly payments.
  • Under a chapter 13 repayment plan, debts are repaid out of current income over three or five years (depending on whether the debtor wants full or partial payment). The court appoints someone who will make sure that payments are made each month until all obligations have been met—usually a trustee in bankruptcy court or an attorney working for one who does this work for free as part of their job description; these people are called "debtors' counsel." If necessary, creditors may be required to refile their cases after completion of the plan so that they'll receive what is fair under state law rather than all they're owed under federal law; however, there aren't any guarantees about how much will be paid back because some debtors might not have enough money coming in each month.

Types of Debt Not Discharged in Bankruptcy

What Is Bankruptcy?

Not all debts are discharged in bankruptcy. For example, student loans and child support are considered "non-dischargeable" debts. However, there may be exceptions to these rules depending on your circumstances and the laws in your state.

Taxes also cannot be discharged in a Chapter 7 case; however, you may have some hope if you include taxes as part of your Chapter 13 repayment plan or if you file for Chapter 13 instead of Chapter 7.

Debts incurred through fraud cannot be discharged in bankruptcy either (i.e., debts from fraudulently obtained credit cards).

Suppose you've filed for bankruptcy before and want to extend it to include new debts accrued after the previous filing date. In that case, you'll need to list those new obligations on your petition form when filing again to include them in the current dischargeable debt total.

How Does a Bankruptcy Trustee Work?

A trustee is appointed by the court to manage your bankruptcy case. The trustee's job is to ensure that the bankruptcy process is fair to all parties involved. They will review your financial situation, determine if you qualify for bankruptcy, and then file your paperwork with the court.

After a few months (depending on your debt), they will give final approval of your case and send out notices informing creditors that they must stop contacting you regarding debts included in bankruptcy proceedings.

Is It Better to File for Chapter 7 or Chapter 13 Bankruptcy? 

What Is Bankruptcy?

If you have a steady income and want to keep your assets, Chapter 13 is better for you. In Chapter 13, you create a plan that pays off all or some of your debts over three to five years. You pay your creditors through a court-approved payment plan. The court will then discharge any remaining debt after the repayment period (as long as certain conditions are met).

Under this type of bankruptcy, the trustee can only sell property that generates income or can be used in business operations—like rental properties, vehicles, and tools of the trade—and only after first selling nonexempt property (property with no protection against seizure). Unlike Chapter 7, where most debts are discharged immediately without having to do any repayment plans, under Chapter 13, all funds generated from selling nonexempt assets must go directly into repaying creditors' claims before they are discharged from their obligations.

So if you can repay your debts within five years by selling some of your property—it may make sense to file under this option since it allows one last chance at paying off debts without losing any more than necessary while avoiding wage garnishment or other negative repercussions if they fail later on down the road due to lack of funds available when needed most during those difficult times like losing their job unexpectedly due to bad luck or illness etcetera.

Effect of Declaring Bankruptcy

You may wonder what impact declaring bankruptcy will have on your life. Although filing for bankruptcy is not necessarily good, it can be beneficial in many ways.

First, filing for bankruptcy can help clean up your credit score by removing past debts from your report and giving you a fresh start with lenders. This means that even if you have previously had bad credit or are planning to apply for loans, declaring bankruptcy may be an option worth considering.

Second, a recent study found that people who declare personal bankruptcies aren't necessarily worse off when finding jobs than those who don't file (though other factors could play into this). The takeaway here is that while some employers might see an applicant's history of financial difficulty as a red flag, others may not care as long as the applicant has learned from their mistakes and shows growth potential moving forward.

In addition to these benefits (and others), there are several downsides associated with declaring personal bankruptcy.

Bankruptcy as a Way to Get Financial Relief

What Is Bankruptcy?

Bankruptcy can provide you with the tools you need to get back on track financially, such as:

  • A clean financial slate.
  • Your creditors and debt collectors cannot contact you, and they cannot sue you for payment of their debts; however, there may still be some taxes and court costs that must be paid back before bankruptcy will be finalized.

Final Verdict

The most important thing about bankruptcy is that it's a legal process that helps you get out of debt and protect your assets. Bankruptcy stops creditors from collecting money from you. It also allows people to start over after going through financial hardship by wiping away most debts. You can talk with an attorney specializing in this area of law to advise you on the filing process.

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