Many individuals and businesses rely on credit, but some fail to repay their debt. While a few opt for refinancing options and loan deferment, others declare bankruptcy. But what is bankruptcy essentially? Who can file for it? And are there any actual benefits? If these are the questions on your mind, you’ve come to the right place. This article helps answer these questions and provides a basic insight into bankruptcy.

What is bankruptcy?
Companies or individuals who reach a stage where their debt becomes overwhelming and impossible to repay consider filing bankruptcy. In technical terms, bankruptcy is a legal proceeding where a judge and court trustee examine the assets and liabilities of the debtor. If the court finds that the debtor cannot pay back what they owe, it may discharge their dues. But if the debtor still has the ability to repay, the case may be dismissed, and they may have to use all their assets, including their home, jewelry, and other valuable possessions, to pay the creditors. The court may also develop a customized repayment plan depending on the debtor’s financial situation.

Bankruptcy laws are written to give individuals and businesses a second chance and a fresh try. However, the drawback of having strict rules against bankruptcy is that it discourages people from taking massive credits, hampering the growth of businesses in some cases.

Who is eligible for filing for bankruptcy?
Individuals and businesses with no scope of paying their debt can file for bankruptcy. If debtors were given ample time to pay up and still cannot arrange for the money, they might surrender their business in the hands of the court. Many companies also use bankruptcy as a financial planning tool because it gives the business a chance to repay whenever it can. As mentioned, the court creates a repayment plan, keeping several factors in mind.

However, one must note that while businesses and individuals who file for bankruptcy get a second chance, it severely affects their credit score, reputation, and future credibility. It becomes challenging to reclaim your assets like a house, car, jewelry, or any valuable item with a substantial market value that may have been seized.

What are the benefits of filing for bankruptcy?
Bankruptcy is an emotionally-draining process that has its pros and cons. It is the only solution for some businesses. Filing for bankruptcy starts with finding the right lawyer to educate you on the options left. Once filed, debtors can stop worrying about debt lawsuits, wage garnishment, foreclosure, agency calls, and repossession of property. Bankruptcy, in some cases, can also help get rid of old debts, protect properties from being sold, and end the trail of growing debt.

What forms of debt don’t qualify for bankruptcy?
Particular loans are not eligible for discharge of debt under chapter 7 bankruptcy. These include government-funded student loans, a few forms of tax debt, federal tax liens, child support, alimony or spousal support, fines and penalties, cooperative housing fees, specific tax-advantaged retirement plans, and debts for personal injury or death due to a motor accident.

Are there different types of bankruptcies?
Yes. While there are several types of bankruptcies, you may find yourself dealing with chapter 7, chapter 11, and chapter 13 in most cases. The structure of repaying debts differs in each type of bankruptcy. For instance, the individual debtor must wipe out most debts in chapter 7. In chapter 11, large-sized businesses can restructure and get back to function. According to chapter 13, sole-owner businesses can operate till they repay the debts.

As mentioned, the first step in filing for bankruptcy is to find a bankruptcy attorney. When looking for one, make a note of their past performances and study their cases, strengths, and qualifications to know if they are suitable for your situation. Take suggestions from friends and families who deal with lawyers and may have a good knowledge or network in the industry.