Today’s post is a guest post from Sarah Scrafford. It is written from an American perspective and gives information about US bankruptcy. For our British readers, we will write about bankruptcy another day. Thanks to Sarah for the post.

Debt is extremely easy to accumulate and just as hard to pay off. Indiscriminate usage of credit cards, frivolous spending and high interest rates have led to a large number of Americans steeped in debts that leave them wringing their hands in despair. In extreme situations, when debtors feel that absolutely cannot pay off their debts, there is one option left to them to wipe away the money they owe and start on a clean slate – filing for bankruptcy.
There are two common chapters under which an individual can file for bankruptcy -

• Chapter 7: This process involves the liquidation (conversion to cash) of all property that the debtor owns (some kinds of property may be exempt from the liquidation process), with the proceeds going to settling his/her debts. A court-appointed trustee handles the sale and repayment aspects. There are some kinds of debts that are dischargeable under Chapter 7. This is the most common form of bankruptcy filed in the USA.

• Chapter 13: This option is suitable if the debtor has a steady income and is confident of paying back his/her debts within a certain period of time with some help from the court. The repayment process is carried out over 5 years under court supervision, usually with a cancellation of the interest owed. A detailed plan is drawn up and agreed upon by the creditors, the debtor and the court. The debtor is obliged to follow the plan religiously till his/her debt is paid off in its entirety. This form of bankruptcy is sometimes better than Chapter 7 because it provides for a full discharge under certain conditions if the debtor has paid back his/her debts according to the plan.

Filing for bankruptcy is equivalent to sounding the death knell on your credit history, so think long and hard before you resort to this course of action. Regaining a solid footing with the credit bureaus after you’ve been declared bankrupt is a long process that entails a combination of efforts designed to improve your credit history. Try alternatives like earning more money, consolidating your debt or taking out loans at lower rates to repay outstanding and pressing debts before you throw in the towel.
The process of bankruptcy is complicated and varies from person to person and state to state. Consult a lawyer or an expert in the field before you make a decision.

By-Line

Sarah Scrafford is an industry critic, as well as a regular contributor on the subject of entrepreneurship. She invites your questions, comments and freelancing job inquiries at her email address:

This post is featured in the Carnival of Personal Finance at Moolanomy