How Bankruptcy Works

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Author: John Mussi

Bankruptcy… a frightening word with serious connotations. In recent years governments have been cracking down, making penalties for bankruptcy more severe in an attempt to make them more difficult to attain so that only those in serious need can apply for them.

Despite the negative image that is associated with bankruptcy and the various problems that come along with declaring a bankruptcy, it doesn't have to be frightening; after all, bankruptcy was designed as a way for those individuals and businesses who find that their finances are out of control to get the help that they need to organize their finances and pay off their debts.

Once you take the time to understand what bankruptcy is and how it works, you won't find it as scary as you did at first.

Defining Bankruptcy

Bankruptcy is a legal term, meaning that an individual cannot within reason pay off their various debts and have allowed the court system to take over their finances for this purpose.

When filing for bankruptcy, the court will appoint someone to work out the payments to your creditors and to determine how much of your income must go to repay these debts. The court will either allow you to make payments, or more likely will deduct a portion of your paycheck toward this goal.

During this time, your credit will be limited… both by legal action and by the reluctance of creditors to issue credit lines to individuals who have declared bankruptcy.

Once the total amount set by the court has been repaid, the bankruptcy will be discharged and you will be able to start rebuilding your credit from the ground up.

Different Types of Bankruptcy

Several different types of bankruptcy exist, defined by legal codes for certain purposes. The exact types of bankruptcy available differ from one country to the next… in the United Kingdom bankruptcy can only legally be applied to individuals and partnerships, whereas in other countries such as the United States or Canada they can be applied to businesses as well.

Regardless of the limitations or allowances set by the government on who is allowed to declare bankruptcy, the general purpose of bankruptcy remains the same.

Lasting Effects of Bankruptcy

While you are working towards discharging a bankruptcy, your options for credit will be exceedingly limited. Even after you've had your bankruptcy filing discharged, though, you'll still find that you won't have many options for a while… many creditors will still be hesitant to work with you from between six months to two years depending upon the creditor and the service that you're applying for.

You should also take care with any offers that you do receive, because they will likely come with high interest rates and additional fees attached.

Life After Bankruptcy

Bankruptcy isn't the end of the world… it's actually a chance for a new beginning. As time goes by, the bankruptcy on your credit report will begin to matter less and less as you eventually start to establish new positive credit lines and build up your credit again.

Just like negative reports, your bankruptcy will eventually expire from your credit history; the process may take up to seven years, and until it expires there will still be those who are hesitant to deal with you.

Once it expires, however, the negative reports that preceded it will also be long gone… and you'll find that your newer reports are all that remain.