If you are like most people, you have probably heard of bankruptcy. In fact, you may know friends or have family members who have filed for bankruptcy, and you may have heard that it could possibly be a solution to your own financial problems or debts. Most people, however, do not have a real understanding of what exactly bankruptcy is and what role it can play in their financial lives. The most basic definition of bankruptcy is that it is a federal court process in which debtors can either liquidate their debt (Chapter 7) or reorganize it (Chapter 13). The type of bankruptcy you file for will have a great effect on how the entire process is enacted and on how it will affect you and your financial and personal future.

Chapter 7 Bankruptcy, which can be filed for by either individual debtors or by entire companies or entities, is by far the most popular type of bankruptcy in the United States. During the bankruptcy process, the debtor’s assets are seized, excluding those assets that are exempt, and are then used to pay off the debts the person has accumulated. Once this has been done, the bankruptcy will appear on the filer’s credit report for ten years. Not everyone, however, will be eligible for this type of bankruptcy. Those people who have a large enough disposable income to support a Chapter 13 Bankruptcy plan will have to opt for this choice.

Chapter 13 Bankruptcy is, in many ways, superior to Chapter 7 Bankruptcy. With this process, you will work with a financial advisor or bankruptcy lawyer to draw up a plan of action for repaying your debts over a pre specified amount of time. Providing that this reorganization plan is accepted by the federal bankruptcy court, you will then be able to slowly and carefully pay off your remaining debts. This type of bankruptcy will show up on your credit report for seven years and is often looked upon more favorably than a Chapter 7 Bankruptcy.

There are other forms and chapters of bankruptcy that may be used in special circumstances or in certain situations, but these are the most common. If you think that filing for bankruptcy might be a good choice for you, you should be sure that you have exhausted all other options. Bankruptcy should generally be viewed as a last resort, rather than as a first choice for dealing with debt. If, however, it does end up being the best option for you, you will need to do a lot of work and careful planning and research to be sure you select the ideal form of bankruptcy for your situation and that the proceeding is enacted correctly and in a way that is most beneficial to you and your future.  Bankruptcy will not always take care of every single debt you have, so you must be aware of which ones will be affected by the proceedings and which ones will not. Understanding all the information upfront makes the entire process much easier and much more user friendly.