During the last century, any person who is unable to repay his debts was jailed. When in the debtor's jail the bankrupt person had no hopes or opportunity to repay his debts, unless he was fortunate to have a family member clear it. It was a dead-end, but in today's world, debt management could be done by debt counseling. Debt consolidation could be an avenue for clearing debts if used wisely.
What is bankruptcy? It is defined as a process by which a debtor clears his debts with the help of the Bankruptcy Court (Federal Court). A debtor can file for bankruptcy under the bankruptcy laws of Chapter 7 and Chapter 13. Filing for bankruptcy is the last resort because it can blemish the credit report for nearly ten years. A debtor files bankruptcy based on the amount he owes his creditors. Depending on his type of debt he can choose the form of bankruptcy - Chapter 7 and Chapter 13.
If Chapter 7 is the form of bankruptcy chosen by the debtor, the court cancels all his debts provided he surrenders all his properties. However, if he chooses the Chapter 13 as his form of bankruptcy, he is allowed to keep his properties but he has to deposit a stipulated amount in the court to clear off his debts. Under this law, the debtor would be asked to approach a reputed debt counselor who would help him to create an effective financial plan based on his income.
Advantages of Bankruptcy
It is true that society still looks down on people who declare bankruptcy. However, there is a positive side of bankruptcy. It provides immense relief to many a people who are sinking in debt.
When you file for bankruptcy, your debts are cleared off and you have no legal obligation toward your creditors.
One of the major benefits of bankruptcy is the prevention of wage garnishment (The process of deducting money from the salary account of an individual to clear off his debts is known as wage garnishment).
When a person files for bankruptcy under the bankruptcy law Chapter 13, then his properties such as house and car will not be attached to the Federal court to pay off his debts. If any of his creditors had previously taken away his possessions, they will be given the instruction to return the properties back to him.
If you have lapsed on the payment of your utility bills, the utility service providing companies cannot disconnect utility services such as your cable TV and telephone (land and cell). In case they have disconnected they would have to restore the connection immediately.
If you have a loan liability such as a home loan liability and you are unable to clear off the principal and interest amounts, the bank, which granted the loan, can start the process of foreclosure. However, if you have filed for bankruptcy, the concerned bank would have to halt the process of foreclosure and give you certain time period to clear the outstanding loan amount. This is one of the benefits of declaring bankruptcy.
Declaring bankruptcy would help you to clear off many of your debts and give you a fresh start. However, you should be aware there are a few non-dischargeable debts such as a student loan and certain type of taxes which cannot be cleared by declaring bankruptcy.
You should be aware of the fact, if you have chosen Chapter 7 as the form of bankruptcy, then your co-signer or the guarantor would be held responsible if you ever lapse in clearing your debts. On the other hand, bankruptcy under Chapter 13 will not hold the co-signer responsible if the debtor defaults or strays from his financial repayment plan.
It is important that one gets a debt advice from a reputed debt counselor before filing for bankruptcy.