What Is Bankruptcy? Definition, Types, and What to Know

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What Is Bankruptcy? Definition Types, What to Know
Are you facing a mountain of debt, but you aren't making any progress? The bankruptcy process could be the solution you need to get over the hump.
By Sean Pyles Senior Writer | Personal finances and financial debt Sean Pyles leads podcasting at NerdWallet as the producer and host of the NerdWallet's "Smart Money" podcast. On "Smart Money" Sean talks with Nerds from NerdWallet's NerdWallet Content team to answer listeners' personal finance questions. With a focus on thoughtful and practical advice on money, Sean provides real-world guidance to help people improve in their finances. In addition to answering listeners' financial questions on "Smart Money," Sean also interviews guests outside of NerdWallet and also creates special segments to explore topics such as the racial gap in wealth and how to begin investing and the background of student loans.
Before Sean lead podcasting for NerdWallet the company, he also wrote about topics related to consumer debt. His writing has been featured in USA Today, The New York Times and elsewhere. When when he's not writing about personal finance, Sean can be found playing in his garden, going for walks, or taking his dog for long walks. He is based in Ocean Shores, Washington.





Apr 25 2022


Editor: Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Prior experience includes copy editing and news for many Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in mass communications and journalism in the University of Iowa.







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Key takeaways
Bankruptcy is a legal tool to assist businesses and consumers resolve overwhelming debt. It's a complicated process that's best taken on with the assistance of an lawyer.
Chapter 7 and Chapter 13 are the two most commonly used by customers, whereas Chapter 11 is typically used for businesses.
Bankruptcy may make sense in the event that your non-mortgage total surpasses 40 percent of your income and the method of paying it down is unclear.
The effects of bankruptcy on your credit will be severe and stay with you for many years, however you can begin to restore your score in as little as just a few months.
There are other solutions to debt relief that you could consider for example, a .

What is bankruptcy?
Bankruptcy is a legal process that offers relief for people struggling to repay their debts. In the event of a bankruptcy that's filed, consumers can wipe out some amount of unsecured debt or enter a repayment plan with better terms for payment.
A bankruptcy filing puts an end to all calls, debt suits and debt lawsuits . The process can be complicated, and hiring an attorney is advisable however you're likely observe some aspects of your finances improve within six months after filing. Note that some debts, like student loans or recent tax payments and child support generally cannot be eliminated in bankruptcy.
What are the different types of bankruptcy?
The two most popular types that are used for consumer bankruptcy . Chapter 11 bankruptcy is typically employed by companies.
Here's a summary:
Chapter 7 bankruptcy
Also known as "liquidation" due to the fact that most unsecured debts are forgiven, is the fastest and most common form of bankruptcy.
The best option for consumers with a majority of debts that are not secured like medical bills and credit card debt, as well as personal loans.
Eligibility
The test must be passed test, which will determine if you're eligible to file Chapter 7.
Cannot have had an Chapter 7 discharge or a Chapter 13 discharge in the last six years.
Cannot have filed a bankruptcy petition in the previous 180 days, which was then dismissed due to your failure to appear in court or comply with any court order, or you decided to dismiss your own bankruptcy petition because creditors sought court relief to retrieve property they had a lien on.

Chapter 13 bankruptcy
Also known as known as a "wage earners" bankruptcy, it allows debts to be restructured into a payment plan over three to five years.
The best option is for those who own assets they wish to keep, such as costly jewelry or secured debts they want to get current on, like the mortgage.
Eligibility
You should have a steady income.
Taxpayers must be current on their tax returns.
You have been charged for Chapter 13 in the past two years or Chapter 7 in the past four years.
You cannot have filed bankruptcy within the past 180 days and was dismissed due to certain circumstances, such as failing to attend court or respecting the court's orders.

Chapter 11 bankruptcy
It is also known as a "reorganization" bankruptcy, this chapter is typically employed by businesses and corporations.
Best for: Businesses that want to keep operating.
Eligibility
Do not have to have filed a bankruptcy petition in the previous 180 days that was dismissed because you did not appear in court or follow court orders, or you decided to dismiss your own bankruptcy petition due to creditors seeking court relief to retrieve their liens on.

Are you a good candidate for bankruptcy?
The filing of bankruptcy isn't an easy decision It is a difficult one, and you'll need take into consideration the pros and cons of long-term effects on your debt and credit. But in general, if:
You see there is no way to pay off your debts in five years.
Your total debt (excluding a mortgage) is more that 40% of earnings.
You're paying the most you can towards your debts, but aren't making any progress.
The burden of debt is preventing you from reaching your financial objectives, such as saving for retirement.

If you're considering filing for bankruptcy, get free consultations from an attorney who specializes in bankruptcy, and to gain a better understanding of your financial situation, and whether bankruptcy is the best option.
Do you need an attorney for bankruptcy?
The quick answer is: Yes.
The bankruptcy process can be a lengthy and complex procedure. One form improperly filled out could result in the dismissal of your case, which means you would need to wait at least six months to file again. to guide you through the process and ensure your paperwork is completed correctly.
Beware if you're thinking of filing without an attorney: Data from bankruptcy indicates that just 1.4 percent of Chapter 13 bankruptcy cases filed without an attorney in 2012 got an discharge, which means the cases were dismissed and the debts that were eligible paid off in accordance with the Federal Judicial Center.
of Chapter 7 bankruptcy cases filed with an attorney in 2012, 95% of cases were successfully resolved, compared with two-thirds of cases filed without an attorney, according to the data of the center.
A lot of bankruptcy attorneys will demand the payment prior to filing, but you have options to help .
How long will bankruptcy remain for on the credit reports of your clients?
Insolvency filing is the single most damaging action you can do to your credit, since it can be extremely damaging to your credit score .
However, there's a bright spot: Your credit may begin to improve in the months following filing, and the change may be especially marked in the event that you're already in delinquency on your debts.
A 2014 report from the Federal Reserve Bank of Philadelphia found that those who filed Chapter 7 bankruptcy saw their scores increase from an average of 538 and an average 600 on a scale of 300-850 by the time the case was discharged which usually takes six months.
There are also actions you can take to help .
• LEARN Canadians?
What are alternatives to bankruptcy?
Based on the type and amount of debt you have there may be other options solutions to settle your debt.
Use this calculator to explore your options for debt relief such as an approach to managing debt from a nonprofit credit counseling agency, do-it-yourself methods and consolidation.
Find out where every dollar gets spent
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Author bios: Sean Pyles is the executive producer and host of NerdWallet's Smart Money podcast. His writing has been featured in The New York Times, USA Today and elsewhere.







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