People who are so overwhelmed with debt that they cannot repay often consider bankruptcy as a way out.  This process involves going before a court and the court then decides what lenders you should or shouldn’t continue to pay.

The three types of bankruptcy are:

Chapter 7

When you file Chapter 7 bankruptcy, your assets are liquidated.  This is also known as straight bankruptcy.  You will have to sell off all your possessions and the profits from that are then distributed among your lenders.  Anything left over that is not paid is then discharged through the bankruptcy claim.  Taxes also have to paid although you may be able to temporarily stop payments while making the bankruptcy claim.

Chapter 11
This type of bankruptcy involves a reorganization of your assets and payments to lenders.  If you are a commercial company, it allows you to remain in business and keep your assets.  Your finances are just reorganized by the court.

Chapter 13
The Chapter 13 type of bankruptcy is where you make a plan to repay your lenders in no more than five years.  The lender, the court, or the trustee provides a plan of payment that is reviewed and then approved. This is good for consumers who have credit card debt of up to $100,000 or mortgage loans up to $350,000.  The amount to be repaid takes two things in to consideration:  it must equal what would be normally repaid under Chapter 7 and it is based on the debtor’s income.  This allows you to keep much of your property and assets.  However, the bankruptcy claim still appears on your credit records.  You must follow your new payment plans.  If these are not repaid by the end of the term, the creditors can file bankruptcy under Chapter 7.

Is this a valid way to get yourself out of debt?  Much of it depends on your financial situation.  When you file bankruptcy, you can relieve yourself of debt, but you may also end up losing most of what you own.  It leaves a mark on your credit report that will make it difficult for you to get loans in the future.

This is a formal way for you to take charge of your financial situation and repay your debts over an extended period of time.  If you have been stressed about your bills, this can be a relief, but it make prove to be a financial burden in the future.