Bankruptcy Explained
What is Bankruptcy?
You may have heard stories on the news about companies filing for bankruptcy in the past and not been entirely sure what it meant. Sometimes when a business files for bankruptcy they go out of business and are never heard from again. Other times a business may file for bankruptcy and continue operating for decades as if nothing ever happened. So what is bankruptcy and what does it mean to the consumer?
Bankruptcy is NOT the End of the Road
Bankruptcy is a legal method of discharging (or eliminating) most types of debts. After the legal obligations and requirements are fulfilled, a chapter 7 bankruptcy order signed by a judge essentially tells all of your creditors that you no longer owe them anything for their debt, that they cannot hassle you for the debt any further and sets you free from needing to concern yourself further with those obligations. The downside to bankruptcy is that it is absolutely the worst thing you can do to your credit record. After a bankruptcy filing most people have their credit scores lowered to the neighborhood of 500 or less. The bankruptcy ruling can stay on your credit reports for as long as 7 years and make it difficult to get credit for the first few years after you file.
Despite the harsh attack on your credit record, a chapter 7 bankruptcy filing does not completely ruin your chances of getting credit. For one thing, your credit begins to rebuild almost immediately after a bankruptcy, and taking care of your credit by paying bills on time, or even by opening a new, secured credit card and paying it off every month can begin to lift your credit score to new highs in just a year or two.
You will not usually automatically lose the home you are living in or the car you drive if you file for bankruptcy - as long as you continue to pay on these debts, those items will not be repossessed from you, and though the lender for your home or car can no longer pester you for payment or notate your credit report, they can foreclose on the home or repossess the car if you fail to make your payments in a timely manner.
Not for all Debts
Not all debts are eligible for discharge in bankruptcy protection. Certain types of debt - the most notorious two are the IRS and Student Loan debts - cannot usually be discharged in a bankruptcy filing. If you are counseled to file for bankruptcy, it may eliminate your credit card, house, car, personal loans, payday advance or other debts, but if you owe the IRS money or Sallie Mae, you can be sure those debts will still be waiting for you on the other side of your discharge.
Chapter 13
Chapter 13 bankruptcy is a reorganization and is rarely done for personal debt. This type of bankruptcy forces your creditors to give you some 'breathing room' and to renegotiate the terms of your debt to something much more favorable for you and easier to repay. Once this reorganization takes place, you will have 5 years to repay your debts.
Bankruptcy Requirements
In October of 2005 Congress passed laws which make filing for bankruptcy much more difficult. Bankruptcy attorneys have to get involved in the process now and risk taking on some liability for an improper filing. This of course has caused most legal firms to drastically hike up the fees they charge for handling a bankruptcy case. In addition, before having debts discharged in a bankruptcy, consumers must now receive professional counseling such as that offered by most businesses in DebtTherapyExplained.com's vast network.
