Eli5 how does filing for bankruptcy work? Do you just stop having debt and get to start over?
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It’s rather a bit more complicated. For example, some types of debts can not be discharged. But you will get a fresh start on everything else … oh ya, and a public judgment mark at the credit bureaus that will severely limit you for the next 10, not 7, years.
It is not something to do lightly.
This is something that varies massively from one country to another, and some countries have multiple different forms of bankrupty that apply to different kinds of entities (individuals, corporations, partnerships, etc.).
> Do you just stop having debt and get to start over?
It’s usually much more complicated than that. You may have various restrictions placed on you, your finances will probably be examined to make sure you aren’t hiding money somewhere, some of the remaining assets you do have may be sold off to pay your creditors (there are usually limits to this: they probably won’t demand that you take your clothes off), and some of your debts might be restructured instead of being written off. And obviously you will probably find it much harder to borrow money in the future.
There are two types of bankruptcy in the USA for the general public.
Reorganization: This is where you present the judge all the information about your income, assets, and debts. Your lawyer and you also drop up a repayment plan for all or some of your debts, and you get to keep the assets if you can make the payments. The judge looks over the repayment plan and then asks any of your creditors if they have any objections. Then the judge decides if the plan is reasonable and if so you go on your merry way. You pay on the plan until the end date and the agreed upon money has been repaid, then you are debt free.
Liquidation: With liquidation bankruptcy essentially what happens is that you present the courts with your assets and debts. They will seize any assets worth a high value, and sell them. They will usually let you keep 1 vehicle and possibly your house depending on how much you have in equity. Then, you are debt free. However, if your income is too high the courts will not let you do this and instead require you to do reorganization and repay your debts.
Some good answers have been given.
Bankruptcy has changed a great deal over the years and is not static now. Whenever someone is considering this option, it is important to talk to a bankruptcy attorney before making a decision. Never rely solely on information and advice from friends, co-workers, family members, even if they have been through it. They can give their own experience. But only a true professional in the field will know what the rules and options are at any given time.
Also, bankruptcy varies a great deal from nation to nation. Some countries have very punitive bankruptcy laws, others are much more forgiving and try to preserve economic assets.
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