Bankruptcy is an act of declaring a persons' or business' inability to pay back what they owe creditors.
Some people declare bankruptcy because of a job lost or pay cut but most people file because they have used more credit then they can afford to pay back.
Most businesses go bankrupt because they are no longer making a profit, are going out of business or if they have been or are being heavily sued for an accident or other reasons.
There are 3 main types of bankruptcy, usually a bankruptcy lawyer will help you decide which one is best suitable for your situation.
Chapter 7 bankruptcy: This type of bankruptcy terminates all unsecured debts.
This is the most common type of bankruptcy, it is the one that basically gives you a clean slate and lets you start over at zero.
Chapter 7 bankruptcy can be used by individuals or small businesses.
Chapter 13 bankruptcy: Also used by individuals or small businesses, chapter 13 will restructure the amount you owe or the amount you pay per month.
This is usually filed when a person took a pay cut or a business is down in profits and can not afford to make the monthly payments anymore but still makes to much to file for chapter 7.
With chapter 13 an individual or business still pays back the debt but at a reduced amount or over a longer time period.
Chapter 11 bankruptcy Chapter 11 bankruptcy is similar to chapter 13 except that it is mainly used by individuals and big businesses that have very large amounts of income and very large amounts of debt.
Chapter 11 has a lot more restrictions and rules then the other 2 types of bankruptcy.
Bankruptcy should only be used as a last resort because it will ruin your credit and it will also be reported on you credit report for up to 10 years that you have filed for bankruptcy.
There are some alternatives to bankruptcy like credit counseling or debt consolidation.
There are also some situations where you cannot afford to pay your debt payments anymore but bankruptcy is not necessary.