Learn tips for how to stay out of debt, as well as topics like debt consolidation, in this free lesson.
What is bankruptcy?
Bankruptcy is a legal procedure that provides a financial fresh start to people who cannot pay their debts. It is a serious step and should not be considered a quick fix for money woes. Bankruptcy should only be pursued as a last resort when all other attempts to solve financial problems fail.
There are three types of bankruptcy:
- Chapter 13 is for when you are temporarily unable to pay your debts and would prefer to pay them in installments over a period of time. You can usually keep your property, but you must earn wages or have another source of regular income, and you must agree to pay part of that income to creditors. A federal court must approve your repayment plan and your budget. A trustee is appointed and will collect the payments from you, pay your creditors, and make sure you abide by the terms of your repayment plan.
- Chapter 11 is primarily for the reorganization of a business. Under Chapter 11, you may continue to operate a business, but your creditors and the court must approve a plan to repay debts. No trustee is appointed unless a judge decides that one is necessary. If a trustee is appointed, the trustee takes control of your business and property.
- Chapter 7 is for debtors who cannot pay their debts. Under Chapter 7, you may be able to keep certain property, and a trustee may take control of the remaining property of value and sell it to pay creditors.
Bankruptcy does not fix a bad credit history, and it remains on your credit record for up to 10 years. It also may be a roadblock toward getting a mortgage or credit card. Also, not all debt can be cleared up through bankruptcy. For example, you must still pay taxes, alimony, child support, student loans, and court fines.
Check with a financial counselor to find out if it's necessary for you to file bankruptcy. Instead, you may be able to reach an agreement with your creditors.