Personal Bankruptcy - The Ins and Outs

When debt takes everything you've got, sometimes the only option left is bankruptcy. It happens to many different people for many reasons and is a legitimate way to get out of financial trouble if you're doing it for the right reasons.

Bankruptcy is a process that can help people or businesses repay their debts under the protection of bankruptcy court or wipe out their debts completely. As soon as you file either type of bankruptcy, your creditors are no longer allowed to take action to collect debt from you without court approval.

Claiming bankruptcy can lower or remove any debt you owe, but it should always be viewed as a last resort, because although it either partially or completely eliminates debt, it also has consequences.

There are two kinds of bankruptcy to claim: liquidation or reorganization. With liquidation, your assets are sold off to pay your creditors. After this sale and repayment your creditors are no longer allowed to request repayment from you, but the bankruptcy will stay on your credit history for 10 years, preventing other creditors from lending you money.

With reorganization, you file a repayment proposal with the courts, which results in you repaying some debts in full, repaying others partially and repaying some not at all. These payments plans usually run from three to five years.

It is important to realize that some debts cannot be forgiven through bankruptcy. Check out the following list:

- Debts you forget to put on your bankruptcy papers
- Alimony or child support
- Debts incurred through injury or death resulting from drunk driving
- Most types of student loans
- Any fines imposed for breaking the law
- Any tax debts incurred

Usually once you have claimed bankruptcy, your wages are garnished and the courts will make payments to your creditors. If you stick with the repayment plan, those creditors may issue you credit in the future. However, you are unlikely to obtain credit from other creditors as the bankruptcy will stay on your credit history for seven years.

Even though bankruptcy can ease the financial burden, it is not for everyone. It will not fix bad spending habits or poor financial planning. And, it will make things considerably more difficult for you financially in the next 7 to 10 years. So, if you can prevent bankruptcy, you will be much better off.

Bankruptcy can be prevented through good financial planning. This means avoiding impulse spending, charging items to credit cards, buying more house than you can afford, making high-risk investments, or getting financially involved with others who have bad finances. Some good things that can improve your finances include creating and maintaining a realistic budget, making responsible purchases and tearing up any unwanted or high-interest credit cards.

If you think your debt is beginning to get out of control, consider consulting a financial expert or a credit counselor. They can help you turns things around.