What does it mean when someone declares bankruptcy?
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Declaring bankruptcy is asking the court for protection against your creditors. In a Chapter 7, which is a full discharge, the court goes through your debts and disposes of them, ending all collection activities like collections and law suits or other legal actions against you. At the same time it gives you bad credit as it shows that you didn’t manage your debt wisely and it will effect your ability to borrow for at least 7-10 years.
Basically you make a legal declaration that you cannot pay the money you owe to the people it’s owed, even if you sold all your assets and neither are you able to service that debt on an ongoing basis ( ie your income is not enough to make the payments being demanded).
Exact rules vary depending upon where you are but generally the court will take control of your assets and income and come to arrangement with your creditors as to how much you should pay back and on what schedule. You will havecto justify any expenditure over and above a certain amount needed to live an everyday life ( ie you’d be allowed a basic car but no Ferraris)
Because in general your creditors will have to accept less than you actually owe them the consequence fir you is that it significantly affects your ability to obtain credit for a period of time. It can also affect your ability to do certain types of employment too.
In a world without bankruptcy protection, if you get into a situation where you owe someone more than you are able to pay, you will be hounded by debt collectors trying to wring you out for any bit of value they can get out of you. Presumably for the rest of your life, as being reduced to poverty from all the collections seriously limits your options for income to pay back loans, and the interest you will rack up will probably spiral out of control.
Bankruptcy protection is effectively going to a court and saying, “Look. I messed up. I’m effing broke. And I will never be able to pay this off. Can you just tell these guys to chill?” After verifying your absolute brokeness with the court (which tends to involve relinquishing nearly every item of value to your name, minus some bare living essentials), the court nullifies your debts and tells the debt collectors to go pound sand. You are free to start over fresh…ish.
It beats being locked into indentured servitude for the rest of your natural life, but the stain of having to declare bankruptcy on your public record will signal to other lenders that you’re not a reliable borrower. I mean, you borrowed a bunch of money from someone, lost it, and effectively stiffed them. Not a good look if you ever need to borrow money again in the future.
Very generally, bankruptcy is when someone says, *look, I don’t have the resources to satisfy all my obligations, something’s gotta give.*
In the old days, what he would often do next was to gather up all his movable wealth, secretly leave town, and start over somewhere else under an assumed name. Because you could go to prison or worse for not paying your debts. Then the people he owed money to would squabble among one another to grab up the properties he’d left behind for themselves. Some of them got rich, others got screwed. It was a huge mess.
And, now that I’ve written this much, I see other answers have done a perfectly-good job of explaining what the modern situation is, so, go read those.
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