What does it mean when someone declares bankruptcy?
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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.
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