If youre reading this, youre probably thinking about (or in the middle of) bankruptcy. The world may tell you this route is a fresh start . . . or a horrible ending. But whats the truth about bankruptcy?

In simple terms, bankruptcy is a legal process a person can go through to clear some of the debts theyre unable to pay.

If youre so overwhelmed by debt that bankruptcy feels like your only option, know these three things: 1) There is hopeand you will be okay. 2) There are other optionsand you should try every single one before jumping into bankruptcy. 3) Bankruptcy does not define you and will not be the end.

Keep these three things in mind as you read through the rest of this article and learn the truth about bankruptcy, including a breakdown on these specific topics:

What Is Bankruptcy?What Are the Types of Bankruptcy?How Does Bankruptcy Work?What Happens if You Declare Bankruptcy?What Are the Consequences of Declaring Bankruptcy?Should You Declare Bankruptcy?What Are Alternatives to Filing for Bankruptcy?

What Is Bankruptcy?

Bankruptcy is a court proceeding where you tell a judge you cant pay your debts. The judge and court trustee look through your assets and liabilities (aka what you own and what you owe) to decide whether to discharge (or cancel) some of your debts. If the court finds that youreally have no means to pay back your debt, youll go through the official process of declaring bankruptcy.

The term bankruptcy probably came from the Italian phrase banca rottawhich literally means broken benchbecause in medieval days, if a merchant couldnt pay their creditors, they could come break the merchants market stall (or bench).1

Get help with your money questions. Talk to a Financial Coachtoday!

What about bankruptcy in America, specifically? Well, several different bankruptcy acts popped up during times of economic crisis before the Bankruptcy Act of 1898. This one said bankruptcy didnt require the creditors approval and stuck around until the Bankruptcy Reform Act of 1978which set the laws we follow today.

Now when you file for bankruptcy, no ones coming to smash your bench (thank goodness!), but its still a painful experience.

What Are the Types of Bankruptcy?

There are six different types of bankruptcy:

Chapter 13 is a bankruptcy method for individuals where the court approves a plan for you to repay some or all of your debts over three to five years. You get to keep your assets and youre given time to bring your mortgage up to date. You agree to a monthly payment plan and have to follow a strict budget monitored by the court. (Theres no privacy in bankruptcy.)

People can file for Chapter 13 bankruptcy if their unsecured debt is less than $419,275 and their secured debt is less than $1,257,850.2

Chapter 7 bankruptcy is the most common type for individuals. In this case, the court sells all your assetswith some exceptionsso you can pay back as much debt as possible. The remaining unpaid debt is usually erased.

You could lose your home (or the equity youve put into it) and your car in the process, depending on what the court decides. Theres no set amount of debt you need to qualifythe court just has to decide you dont make enough money to pay off your debt.

Usually just for businesses, Chapter 11 creates a plan for how the business will still run while paying off all their debt.

Chapter 12 bankruptcy allows farmers and fishermen to get on a payment plan for their debts to avoid foreclosure on their property.

International bankruptcy cases are handled in Chapter 15.

Chapter 9 bankruptcy is a repayment plan for towns, cities, schools and the like to pay back their debt.

P.S. For specific information about bankruptcy laws in your area, visit theUnited States Courts website. There youll find info on the process and where to find help in your area. Theres a bankruptcy court for each judicial district in the United States90 districts in all.

How Does Bankruptcy Work

Youll see this theme throughout this entire article: bankruptcy sucks. If you can avoid it, avoid it. (See the What Are Alternatives for Declaring Bankruptcy section for practical ways to do just that.) But if you do everything possible to avoid bankruptcy and still come to that point, heres a quick overview of how to file for bankruptcy and the paperwork youll need to get ready.

Yeahit's going to feel like you're digging up and showing off every bit of private information you've ever had.Really, the only upside is they dont ask for that awkward eighth grade yearbook photo.

Theres a heck of a lot of paperwork and forms and documents involved in bankruptcy, but lets talk about what you need to gather up at the start:

Yes, thats a lot. Bankruptcy is not an easy out! Also, your particular state or court system may require more. Get ready to do a lot of hunting and have a lot of patience here.

What Happens if You Declare Bankruptcy?

If you declare bankruptcy, creditors have to stop any effort to collect money from you, at least temporarily. Most creditors cant write, call or sue you after youve filed.But even if you declare bankruptcy, the courts can require you to pay back certain debts. Each bankruptcy case is unique, and only a court can decide the details of your own bankruptcy.

Lets talk for a moment about what bankruptcy does and doesnt cover:

Bankruptcy can stop foreclosure on your home, repossession of property, or garnishment of your wages. (Garnishment is when the court orders part of your paycheck to be sent directly to your creditorwithout you ever seeing the money). Bankruptcy cancels manybut not allof your debts.

What Are the Consequences of Declaring Bankruptcy?

Lets not sugarcoat it: Bankruptcy takes a huge emotional toll on a person. It ranks up there with divorce, loss of a loved one, and business failure. Beyond the emotional impact, here are other effects of declaring bankruptcy:

This means your name and other personal information will appear in court records for the public to access. Thats right . . . Potential employers, banks, clients and businesses can access the details of your bankruptcy.

Filing fees for Chapter 13 bankruptcy will cost around $310 plus attorney fees, which can be anywhere from $3,000 to $4,000. For a Chapter 7 bankruptcy, youll shell out $335 for filing fees and $1,500 to $3,000 for an attorney.3

Unless you pay cash for a home, it could take one to four years before you qualify for a mortgage loan.4

We arent pro-credit scores, but its important for you to know a bankruptcy dings your FICO. Hard. And that ding lingers. Chapter 13 bankruptcies stay on your credit report for about seven years, and Chapter 7 stays on there for 10 years.

Weve touched on this some, but declaring bankruptcy doesnt make all your problems go awayand it doesnt even make all your debt go away. Most student loans, alimony, child support, any reaffirmed debt, unpaid taxes, government debts or court fines arent cleared in a bankruptcy.

Should You Declare Bankruptcy?

Listen. Weve said it before, and well say it again: Bankruptcy should be your very last option. Check out all the alternatives (aka how to avoid bankruptcy) below. Try each and every one. If nothing works, and youre still so overwhelmingly underwater that you simply cannot swimthen and only then do you declare bankruptcy.

What Are Alternatives to Filing for Bankruptcy

Before you even start gathering up that giant pile of documents you need to file for bankruptcy, go through this list of alternatives:

Budgeting may seem intimidating, but its just a plan for your money. And if youre planning to get out of debt and avoid bankruptcy, you cant do it without a budget. You need to see exactly what money you have coming in and where all of it is going.

Once you see what your money is doing, you can start telling it what you want it to do. And what you want is to have more money freed up to pay off that debt.

That means cutting extras and spending less money. That means learning tips on how to save money on everything. That means being super intentional with every single dollar you make and spend.

Yes, its work. But it could be the exact thing that keeps you from bankruptcy. Dont. Skip. This.

When youre making a budget that will work for you right now, where do you start? Whats the main stuff you need to focus on covering? Start with what we call your Four Walls: food, utilities, shelter and transportation. These are the main essentials.

Keep everyone fed, the lights on, a roof over your heads, and gas in the car to get to work. If these Four Walls are only things you can pay for while youre getting out of debt, thats called survival mode, and that may be what you need to jump into right now.

Heres the deal: If you declare bankruptcy, youre probably going to lose some of your stuff anyway. So right now, sell everything you can. Be the one in charge of what goes and what happens to the money coming in from those sales. Put all of that money straight toward your debt.

You dont have to walk this alone. Read that again: You dont have to walk this alone. Get with a financial coach and talk about your situation. They arent here to judgetheyre here to help.

A financial coach can help you figure out a personalized plan of action for your specific situation. And yes, talking about money can be terrifying, but if you declare bankruptcy, your financial privacy will be out the window immediately. Opening up to a trustworthy financial coach now can help you avoid having to open up to a whole courtroom of people in bankruptcy.

Another way to avoid bankruptcy is to bring in more money. Get yourself a side hustle. There are plenty of ways to work extra hours that fit into your schedule, and also plenty of work-from-home jobs that will keep you from spending extra drive time or gas money.

Youll be busy. But this is for a seasonand if youre on the verge of bankruptcy, youre at war right now. A war against your debt. The good news is, you know who wins. You. Even if you try every single alternative on this list and still cant fight off bankruptcy, you are not defeated.

Hey. We dont say this lightly: Bankruptcy sucks. We know. We also know you can rise above.

Learn how in Financial Peace University (FPU). The teachings in FPU started as conversations over coffee. People struggling with their finances wanted to hear from Dave Ramseyto get hope from his story of hitting rock bottom and digging his way out again. Those conversations eventually turned into our bestselling money course thats been helping people learn how to pay off debt, budget and build wealth for over 25 years. No matter their income. No matter their past.

Start Financial Peace University today and listen to Daves story, learn how to get out of this debt, and believe you can get through thisbankruptcy or no bankruptcy. Because you can. And you will.

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The Truth About Bankruptcy - Ramsey - Ramsey Solutions