- There are two main forms of personal bankruptcy, Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, an individual has many of his assets seized and sold to pay off his debts. For this reason, it is sometimes referred to as "liquidation" bankruptcy. Chapter 13 bankruptcy is less severe. If a person qualifies, he is allowed to keep most of his assets but must reorganize his finances in a way that allows him to pay off his creditors.
- Under Chapter 7 bankruptcy, most of a person's outstanding debts are written off, meaning the person is no longer obliged to pay them. The only debts that a person must still pay are those that she owes to government agencies, such as for back taxes or court-ordered child support. When these debts are written off, creditors are no longer allowed to try to get the borrower to pay them back. This can help get the filer out from under a mountain of debt.
- One of the downsides to Chapter 7 bankruptcy is that the debtor may have to give up many of his financial assets, including some personal property. The rules of exactly which property and how much of it is exempt from seizure during bankruptcy vary by state. While in some states it's relative easy for a filer to keep his house, in other states he may have to sell it and move to another residence.
- After filing for bankruptcy, especially Chapter 7, a person can expect to have a difficult time receiving reasonable rates on loans and lines of credit for at least the next year after the filing and potentially for many more years after that. This is because bankruptcy will lower a person's credit score by potentially hundreds of points. Although a person can raise this score again by taking out new credit and paying back loans on time, a Chapter 7 bankruptcy can hold down a person's score for up to 10 years.
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