is a legal process that allows individuals and businesses to eliminate or repay their debts under the protection of the federal bankruptcy court. Bankruptcy is typically considered a last resort when other debt relief options have been exhausted.Types of bankruptcy: Chapter 7 and Chapter 13
There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves the sale of your non-exempt assets to pay off your debts. Any remaining unsecured debts, such as credit card debts and medical bills, are typically discharged, meaning you are no longer legally obligated to pay them. However, some debts, like student loans and child support, cannot be discharged through Chapter 7 bankruptcy.
Chapter 13 bankruptcy, also known as a wage earner's plan, allows you to reorganize your debts and create a repayment plan that lasts three to five years. During this time, you make payments to a trustee, who then distributes the funds to your creditors. At the end of the repayment period, any remaining unsecured debts may be discharged.Pros and cons of bankruptcy
Bankruptcy has several advantages, including:
- Immediate relief: Once you file for bankruptcy, an automatic stay is put in place, which stops most collection actions, including wage garnishments and foreclosure proceedings.
- Discharge of debts: Depending on the type of bankruptcy you file, many of your unsecured debts may be discharged, providing a fresh financial start.
- Protection of assets: In some cases, bankruptcy can protect your essential assets, such as your home and car, from being seized by creditors.
However, bankruptcy also has some significant disadvantages, such as:
- Severe impact on credit score: Filing for bankruptcy will have a long-lasting negative effect on your credit score, making it more difficult to obtain credit in the future.
- Loss of assets: In Chapter 7 bankruptcy, you may be required to sell some of your assets to pay off your debts.
- Public record: Bankruptcy filings are public records, which means your financial difficulties will be visible to others.