What does it really mean to go bankrupt?

There are a lot of myths and misconceptions when it comes to bankruptcy. But it is also a process that an increasing amount of Americans are facing.

Filings at the end of March this year “were up almost 12% from a year earlier,” said NPR. This suggests that a “growing number of Americans have reached the point where the pressure of their debt has overcome the stigma of bankruptcy.” While it’s still a last resort option, it can also be a lifeline back to financial solvency.

What is bankruptcy?

Bankruptcy is a legal process that people can go through when they are unable to pay back their debt on their own. Obtaining it requires filing a petition with the courts requesting relief.

The exact form this relief will take depends upon what type of bankruptcy you qualify for. Chapter 7 bankruptcy “can discharge eligible debts entirely, but requires the filer to forfeit nonexempt assets and property,” whereas with Chapter 13 bankruptcy, you “won’t have to forfeit any property, but you’ll need to set up a repayment plan to pay back creditors,” said LendingTree.

Why do people file for bankruptcy?

In short: relief. As soon as you file for bankruptcy, an “automatic stay takes effect, temporarily halting creditors from pursuing collection actions against you, including lawsuits, foreclosure and wage garnishment,” said Investopedia. And while it is generally a last resort, if you have “exhausted all other alternatives, bankruptcy may be the only way to get the financial relief you’re seeking,” potentially even offering a “fresh financial start” after you do the requisite work, said Experian.

However, it is worth noting that bankruptcy is not a guaranteed fix. Not everyone who files will qualify. Further, “certain debts, like child support and unpaid taxes, are ineligible for discharge through bankruptcy,” said Investopedia, which means it might not be the right solution for every situation.

What are the consequences of bankruptcy?

The financial reboot that bankruptcy can offer does not necessarily come easy. For one, bankruptcy has the potential to do major damage to your credit score, remaining on your credit report for up to 10 years. “It can take several years to rebuild your credit history,” said Experian, and in the meantime, you might have limited access to borrowing opportunities, such as a mortgage, credit card or car loan. If you are approved, you will likely pay a steeper interest rate.

Bankruptcy can also result in you losing some of your assets. For instance, under Chapter 7, if you “have a lot of home equity and your home isn’t protected from sale, your trustee might choose to sell it,” said LendingTree.

As such, before you go down this path, it is worth considering some bankruptcy alternatives. Depending on your situation, a debt management plan, debt consolidation or simply negotiating directly with creditors may be a better option.