What is Bankruptcy?

Answer:
Bankruptcy is a legal term used to describe

the inability of a person or organization to repay its debts given the financial assets available to it. Upon the debtor’s discovery that they are unable to pay their debts, they may file their case in a bankruptcy court, which assigns the debtor a court-appointed trustee to help them find a solution.

Depending on the specific type of bankruptcy the debtor has filed his case under, the method of solving bankruptcy may differ. A Chapter 7 bankruptcy is the most common, and is solved by selling all assets the debtor owns, excepting certain exempted assets, such as a house or a car. What assets qualify for exemption depends highly on state and local laws. Debt that cannot be repaid through the selling of assets, also known as liquidation, is discharged.

Chapter 11 bankruptcies are often filed by large businesses or individuals with extremely large debts, and allow the debtor to retain control of its assets while determining a reorganization and repayment plan. Chapter 12 bankruptcies apply specifically to farm owners, who also keep ownership and control of their assets and work out a repayment plan with help from the creditors. A Chapter 13 bankruptcy is similar to a Chapter 11 one, but it applies specifically to individuals.

Although bankruptcy does help to alleviate debts, it affects credit rating severely and may impact an individual’s ability to borrow money in the future. Rather than filing for bankruptcy, an individual may work with his or her creditors to come up with an individual repayment plan, or contact a debt management agency for the same purpose.