How Bankruptcy Works
by: 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.
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
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
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