Bankruptcy

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There are many bad financial things that can happen to you, such as having an overdraft or defaulting on a loan, but bankruptcy is probably the worst. To declare bankruptcy means that the amount of your debts is more than your assets and your income can support, and you have no immediate prospect of paying those debts off in a timely manner. Debt itself is not necessarily a bad thing. Many people are in debt: homeowners are in debt until they finally pay off their mortgage, holders of credit cards are often in debt to the credit card company, anyone who borrows money to buy a car is in debt until the car loan is paid off. The crucial difference between being in debt and having to declare bankruptcy is that when you are in debt, most mortgages, credit cards, and car loans are under control and being repaid on a schedule that is agreed to by the lender. However, when you have to declare bankruptcy, it means that your debt is unmanageable and out of control. Bankruptcy is a serious, complicated situation that requires legal help. Special bankruptcy law courts declare people bankrupt. Applying to be declared bankrupt is called filing for bankruptcy. The underlying point of the U.S. bankruptcy laws is that people who get defeated by adverse financial circumstances should get a chance to start again. If you are declared bankrupt by a court, some (but not all) of your debts are forgiven, which means you don't have to pay them back. However, there are considerable drawbacks, including the fact that your ability to borrow money or obtain credit cards is severely restricted. There are two basic types of bankruptcy for individuals: Chapter 7 and Chapter 13. These are named after chapters in the Bankruptcy Code. A Chapter 7 filing means you have few assets that could be given to creditors and so most debts are erased; Chapter 13 means you have some assets and also the hope of future income and so you must prepare a plan to start repaying your creditors. In 2005 the federal government enacted a significant revision to the bankruptcy laws: the Bankruptcy Abuse Prevention and Consumer Protection Act. This change makes it harder to declare bankruptcy and creates a less forgiving environment when you do. The measure was passed largely in order to deter frivolous bankruptcy filers who would run up huge debts from which they could then walk away with little downside. Among other provisions, the act makes it harder to file under Chapter 7, forcing more bankruptcy filers into Chapter 13 and a repayment plan. See also Insolvency.