What is Bankruptcy?
Debt management programs only work if the consolidated
payment you make leaves you with a reasonable amount
of money on which to live. People may fail even when
following a debt management program, not because of
a lack of discipline, but because they simply don't
have the income to pay those renegotiated credit deals.
The only workable solution for people in these situations
may be to declare bankruptcy.
Bankruptcy is a legal process that allows a person
in a devastating financial situation to clear his or
her debts and make a fresh start. Bankruptcy is not
intended for people who deliberately or heedlessly set
out to cheat and avoid their creditors. It is intended
for people who have unexpectedly become unable to repay
their debts for reasons such as sudden job loss, severe
health problems, divorce, or poor spending or borrowing
choices. To be eligible to file for bankruptcy, you
must owe at least $1000, must not be able to pay your
debts as they become due, and you must be unable to
pay off your debts even if most of your assets were
to be sold. A person in this situation is legally defined
as “insolvent.”
Advantages and disadvantages of bankruptcy
Declaring bankruptcy can be beneficial to a qualifying
individual because it eliminates the responsibility
to pay current debts, harassing phone calls from creditors,
and allows a person to make a clean financial start.
There is, however, a big disadvantage to declaring bankruptcy
-- a bankruptcy stays on a person’s credit record for
at least seven years, and of course, it means that creditors
will not be able to collect money owed to them. As a
result, it is difficult for one to get a credit card
or a loan after filing for bankruptcy. It takes time
to rebuild creditors’ trust. This may not be a bad thing.
If bankruptcy is due to mismanaged budgets or poor credit
choices, this will force a person learn to live within
his or her means.
A steady income and a satisfactory credit rating may
put you in a manageable financial position, and you
may want to consider some alternatives to bankruptcy.
Rather than filing for bankruptcy, it may be wiser for
you to choose to manage your debts, perhaps by consolidating
them or receiving professional credit counseling assistance.
Types of Bankruptcy
- Liquidation - Chapter 7
A liquidation case usually takes place under Chapter
7 of the bankruptcy law. In a liquidation case, a
person’s assets are examined by a court-appointed
trustee to determine if anything is available to be
sold for the benefit of the creditors.
Certain property cannot be sold, and the individual
gets to retain ownership of it despite the bankruptcy.
This property is called "exempt."
- Debt Adjustment/Reorganization - Chapter 13
Debt Adjustment (also called "reorganization")
cases work very differently from liquidations. In a
debt adjustment case, the individual declaring bankruptcy
puts forward a plan (meeting the rules set out in the
bankruptcy law) to repay creditors over time, usually
from future income.
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