The Basics of Bankruptcy

In simple terms, bankruptcy can best be described as a federal process wherein you are allowed to close out all or some of your debt, and enables you (the debtor) to start off with a clean financial slate.

Since bankruptcy is a legal process, you'll have to appear in court before a federal judge. During which, the judge, your creditors and yourself will come to an agreement as to how your debt can be cleared.

This generally falls under two categories:

You and your creditors can come to terms about a new payment plan in which you'll be allowed to maintain possession of all your property, but will be required to repay some or all of your debt by making payments monthly over a period of time. This is known as reorganization.

The next category is referred to as liquidation. This entails your creditors sequestering all your assets that are non-exempt to aid in repaying some of your debt. The remainder of your debt is usually forgiven.

Bankruptcy can be filed by businesses and individuals alike. Once you are seeking a way out of being buried by an inordinate amount of debt, whether you are a business, CEO of a company, soccer mom, or celebrity, filing for bankruptcy can possibly be an option for you.

You should however keep in mind that bankruptcy does have an impact on your credit; as such, you'll find it somewhat difficult to get a loan (depending on who the lender is), even a few years after you have filed.

Chapter 7 bankruptcies are by far the most common. These are liquidation bankruptcies in which the debtors must turn over all "non-exempt" property to a supervising officer known as the bankruptcy trustee. Property is exempt if it falls within specific categories of assets that debtors are allowed to keep, such as a certain amount of clothing, household items, tools for work, and in some instances, vehicles and the family home.

The Chapter 7 trustee will take the debtor's non-exempt property (if there is any), and sell it. The money will be paid to the debtor's creditors. This may result in creditors receiving a small fraction of their claims. The balance of the debtor's loans and obligations are forgiven and can never be collected. Creditors who attempt to collect debts that have been discharged face severe penalties under federal law.