Bankruptcy is a legal process initiated by a debtor to relieve themselves of the obligation to pay outstanding debts that have escalated beyond their ability to pay. It involves assessing and selling debtor assets to generate funds to partially repay creditors. Once completed, the debtor is free of all debt obligations but their credit will be negatively impacted for at least 10 years. Bankruptcy categorizes filings under Chapters 7, 11, and 13, with Chapter 13 allowing a repayment plan that can have less severe effects on credit scores.

1. What is Bankruptcy?
Bankruptcy is the last resort for those whose debts have escalated beyond the ability of the debtor to
pay it off. It is a legal instrument which is usually initiated by a debtor, and in some instances by
representatives of a creditor, in order to relieve the debtor of the obligation to pay outstanding debts.
Bankruptcy usually involves an assessment and evaluation of all debtor assets, which will then be sold or
used to generate funds to at least partially pay some of the money owed to creditors. Once the process
completed satisfactorily, the debtor is free of all debt obligations.
Bankruptcy is a way for debtors to get a fresh start while giving some degree of repayment to creditors.
However, the decision to file for bankruptcy must be given serious consideration. A successful
bankruptcy filing will adversely affect a debtor’s credit ratings for at least ten years, which will preclude
loan applications and other credit facilities during that period. On the other hand, allowing debts to
remain unpaid will also have the same result, so it all depends on circumstances.
In the US, a bankruptcy filing may be categorized under three kinds: Chapter 7, Chapter 11 and Chapter
13. Under Chapter 13, the debtor will be placed under a repayment plan that typically carries lower
interest rates. This type of bankruptcy has less deleterious effects on credit ratings.