Bankruptcy is a legal process designed both to protect a person or business that cannot meet its financial obligations and to protect the creditors involved. To start the procedure, proper papers must be filed. 

What are the bankruptcy rates? 

According to Scripps Howard News Service, almost one in sixty households in the United States is bankrupt.  This number is based on slightly over 2 million individuals who file bankruptcy before the new bankruptcy laws took effect.  Why is it so common?  Bankruptcy filings for the first quarter of 2006 sowed to a 20 year low, while the number of bankruptcies is expected to keep increasing again later this year. 

There are particular chapters of the federal bankruptcy law.  Proceedings under Chapter 7, which is known as straight bankruptcy, involve taking most of the borrower’s property.  The court assigns a trustee to sell off the assets and give out the cash among the creditors.  Proceedings under Chapter 13, which is referred as wage earner’s bankruptcy, involve the borrower proposing a plan to repaying a portion of the debt in installments from the borrower’s income.  Chapter 11 of the Federal Bankruptcy Act is normally used by corporations and not by consumer debtors.  Its proceedings are costly and complicated.  Consumer debtors typically use Chapter Seven or Chapter Thirteen. 

Is the borrower liable? 

As soon as the bankruptcy proceeding ends the borrower is no longer liable.  This happens once the bankruptcy court enters a discharge order in a Chapter 7 case or after the borrower has paid the debts due to the credit grantors according to a plan in a Chapter Eleven or a Chapter Thirteen case.  In legal terms, the court discharges the borrower from all debts.  At this point, the borrower will start over again with a clean financial slate, but the record of the bankruptcy will remain on the borrower’s credit record for a period of 10 years. 

Bankruptcy could be the best, or the only way out for extreme financial hardship.  Nevertheless, it should be used exclusively as a last resort, since it always has long lasting consequences.  Be certain to consult a financial expert before resorting to bankruptcy as a way of solving your economic problems. 

New bankruptcy rulings 

The President signed a new act on April 20, 2005, called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Since this act came into place, it changed almost every aspect when it comes to bankruptcy cases.  Now it is required that you consult with a credit counseling services company approved by the United States Trustee's office before the final decision can be made as to whether you can declare bankruptcy or not.