Bankruptcy is a word with a lot of bad connotations and it’s one that most of us who are currently in debt will cringe at the sound of. However understanding bankruptcy reveals it not to be all bad and when you fully grasp how it works then you may in fact be able to use it as a way to combat your debt and improve your overall financial situation. Bankruptcy is not a mark of failure, it is rather a tool for you to employ to your ultimate benefit.
Essentially when you declare bankruptcy it means that you are proclaiming yourself unable to pay off your debts. You are in other words losing more money than you are earning and your financial situation is gradually getting worse rather than better as you would hope. Allowing this to continue of course is not in anyone’s best interests as the lenders would never get paid and you would plunge deeper into debt. Bankruptcy then is a way of waving a white flag and finding a way out as a result.
When you file for bankruptcy the state will then look at what to do with your existing debt and how to pay this off. For the most part this will mean restructuring and they will converse with your creditors in order to help change the repayments and reduce or freeze interest so that you can manage it. In some cases the state will shoulder some of the financial burden and thereby reduce your debt etc, while in other cases they will completely pay it off for you thereby wiping the slate clean. They will also help you by talking your options through with you and providing advice for how you should go about managing your debt.
When you file for bankruptcy you will be required to prove that you are unable to pay back the debt with your current finances/assets and that will mean that you are required to sell off any existing assets in order to raise the funds. Before filing for bankruptcy then it is often a good idea to seek legal advice regarding asset protection. Asset protection means protecting your assets by transferring them into foreign accounts or pension funds etc, and this can help you to ensure that they can’t be taken away from you so that you have something left to live off of when you have completed the bankruptcy process. Bear in mind however that knowingly using new accounts to avoid paying off debt is illegal, and that there is a very delicate way to do this correctly.
You should also be prepared for your bankruptcy to affect your credit score of course badly. Also note that in some cases you can be forced to declare bankruptcy by your lenders and will have no choice in the matter.