Bankruptcy is a legal preceding that involves a person (or business) that is unable to repay their outstanding debts
Why It's Important
Declaring bankruptcy gives the filer a chance at regaining financial traction after a hard fall. Depending on the type filed, some or all of the debts could be discharged. All bankruptcies have a negative effect on your credit score for up to 7 years! So, this should be a last resort! I hope that none of my followers get to this point but if you do, it is good to know your options. There are three popular types of bankruptcies:
Chapter 7 - This is the most common type of bankruptcy. It allows the filer to have all of their debts forgiven after their "non-exempt" assets are sold and the proceeds are used to pay off as much as possible.
Chapter 11 - This is only for businesses. I won't go into detail but it allows businesses to restructure their assets and debts. The business also stays open during proceedings.
Chapter 13 - This involves repaying some of the debts and having the rest forgiven. Usually, a filer would use this option if they didn't want to give up their property or their income is too high for Chapter 7.