What is Personal Bankruptcy?

If you're having trouble paying back debt and you're starting to wonder what your options are, the idea of declaring bankruptcy has probably crossed your mind. Nearly everyone's heard of personal bankruptcy as a means of managing debt problems, but few are clear on exactly what the procedure entails or how it can help. To answer the question "Exactly what is personal bankruptcy?" here's a brief overview of the procedure.

The basics of personal bankruptcy

Bankruptcy is a legal method of either eliminating debt or developing an affordable payment schedule so those who find themselves with insurmountable debt can get a fresh start. In some areas, the right to declare bankruptcy is available only to corporations. Others, however, allow for personal bankruptcy, a legal procedure that lets an individual declare bankruptcy.

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You're not required to hire a lawyer to file bankruptcy. You can prepare your own petition and represent yourself during the hearing. That said, bankruptcy law is fairly complicated and you won't get any special allowances for error just because you filed your own petition. In most cases, you're better off having a lawyer on your side.

How personal bankruptcy can help you

Contrary to popular belief, there is no type of personal bankruptcy that can free you of any and all types of debt. Debts like secured student loans, taxes, and child support must still be paid. On the other hand, debts for things like credit cards and car payments can be managed by declaring bankruptcy.

Types of personal bankruptcy

There are two primary forms of personal bankruptcy: Chapter 7 and Chapter 13. The most common type is Chapter 7, which is also called a "liquidation bankruptcy." In Chapter 7 bankruptcy, all of the debtor's assets, other than those specifically exempt, such as personal belongings and family heirlooms, are turned over to a trustee for sale. Money from this liquidation sale is then distributed among the creditors.

With Chapter 13 bankruptcy, a plan is created for repaying all or part of the debts, but you're not completely freed of those debts. This is most frequently used to stop foreclosure on a home or to pay taxes on an affordable schedule.

Why personal bankruptcy was created

Much of today's economy is based on consumer debt. Taking on large mortgages, car payments, and credit card debt seems like the norm. Without careful planning, though, these seemingly "normal" debts can easily get out of hand.

While some people find themselves with insurmountable debt because of lack of self control, many more people run into debt due to medical bill, job loss, or other unavoidable events. Personal bankruptcy was created as a way to relieve these debt burdens to give well-intentioned people a chance to straighten out their financial situation.

The downside of personal bankruptcy

Naturally, a procedure as serious as declaring bankruptcy isn't without drawbacks. Bankruptcy remains on your credit report for years and can cause financial difficulties like increased interest rates, which make recovering from financial difficulties even harder. The whole point of personal bankruptcy, however, is to give the debtor a fresh start, so it is possible to regain a normal financial situation after bankruptcy.

If you've been wondering, "What is personal bankruptcy and can it help me?" before you jump to any conclusions, check into your local jurisdictions bankruptcy laws and consult a lawyer before you file.

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