Bankruptcy is a proceeding in a federal court in which an insolvent debtor’s assets are liquidated and the debtor is relieved of further liability. This basically means that a person (or a corporation) was so far in debt that they felt a fresh start was their only option. More than a million Americans filed for bankruptcy last year, and the number continues to rise.
There are three types of bankruptcies:
All three types of bankruptcy may get rid of unsecured debts (those where creditors have no rights to specific property) and stop foreclosures, repossessions, garnishment of wages, utility service cancellations, and activities of debt collectors against you. Chapter 7 and 13 bankruptcies provide exemptions that allow you to keep certain assets, though those exemption amounts vary greatly from state to state.
On the downside, it’s not a “get out of debt-free” card. Here are some of the disadvantages of declaring bankruptcy:
For these reasons, bankruptcy should be used only when there’s no other solution. However, the law forbids discrimination against those who have filed for bankruptcy, so you cannot be denied a job, public housing, or a driver’s license on this basis.
To learn more about what happens if your company declares bankruptcy, read this article.