What Is Bankruptcy? How Does Bankruptcy Work? Pros And Cons Of Filing Bankruptcy

Bankruptcy is a legal state wherein a person or an organization cannot any longer repay their debts to the creditors. This is either filed by the person himself (voluntary bankruptcy filing) or the creditors file it to recover the pending money. The federal bankruptcy court can be approached to carry out the proceedings of filing bankruptcy and repaying off debts to the creditors.


Bankruptcy is of two kinds:

1. Liquidation: The financial assets of a person or organization are sold to pay off the debts of the creditors. This is called Chapter 7.

2. Reorganized: A planned schedule is submitted by the debtor on how he will repay his debt through the monthly salary over a period of three or five years. This is known as Chapter 13.

It is important to know how bankruptcy works before you file for one. Once bankruptcy has been filed, the following bankruptcy procedures may be followed depending on which Chapter you have filed for:

a) Chapter 7: If you have filed for Chapter 7, your financial assets like investments, home, car, other valuables will come under the custody of the court. The court will then liquidate the assets and try to pay off the debts from this money generated. Mostly the unsecured debts are sold off, barring those which are exempt under the federal laws.

b) Chapter 13: In case you have income that is sufficient to repay debts through a planned schedule, you should go for Chapter 13. It also extends over a period of three to five years. In case of secured debts like a car loan, you can make up for the missed payments and avoid foreclosures on the same.

However, it is important to note that bankruptcy can get you rid of debts like medical bills, credit card bills, unsecured loans etc. but cannot eliminate those like child support, spousal support, tax debts etc.

Pros and cons of filing bankruptcy

However there are still pros and cons of filing bankruptcy that you need to consider before you file for one.

First and foremost outcome of filing a bankruptcy is that you are immediately freed of any obligation to be personally accountable for the debts to the creditors. This does not mean that you will not repay them, but only means that they don’t knock your doors directly for retrieving their payments, the court informs them of the filing.

Since you are practically free of such obligations (with conditions), you can freely start all over again with your financial assets. That is like a second chance to improve upon your financial matters.

However, the downside to filing a bankruptcy is that it reflects negatively on the credit report. Once bankruptcy is filed, it stays on the credit report for over ten years, which is quite a long time. That means that getting a credit for a house, car or any other credit would be a difficult task. Interest rates offered to you will be much higher than someone who has a good credit report. This only means that all this will further burden your financial health and may result in poorly managed money matters.

The debtor is protected under the federal bankruptcy court by means of both these chapters – chapter 7 and chapter 13. While it is wise to file for bankruptcy in case of repayment failure, it is also a plunge into a complex and difficult financial future. Filing for chapter 13 makes it a bit easier in terms of retaining the hard earned assets like your house, car etc. while repaying off the pending debts.

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