How does bankruptcy work?
There are many ways to answer the question “How does bankruptcy work?”
A Summary of Bankruptcy, Why It Exists and What It Can Do
The basic idea of people getting relief from debt has been a part of our society as long as history itself. Even in biblical history there is a jubilee year where people are supposed to forgive debts every 7th year.
The practice of filing bankruptcy is hugely common in the United States. Millions of Americans file bankruptcy every year. It is likely that many people you know filed bankruptcy. They just don’t tell everyone.
The basic idea is that every seven or eight years, people should have their debts forgiven. The existence of bankruptcy protection in the US comes from a desire to prevent ‘debtors’ prisons’ and other situations where people are ‘captured’ by creditors. Think about it. If you owe more debts than you can ever pay, and all you do is work day after day to pay those debts, what are you? Are you really free? Is it fair to lend someone money and then force them to work until they die in order to pay it back? Our society says it is not fair to do that. So, we created bankruptcy laws.
They are a legal way that people can get freedom from their debt every 8 years. These laws are particularly important to protect borrowers from predatory lending. Predatory lending is when you give someone money and intentionally make it very hard for them to pay it back. Predatory lenders use high interest rates, finance charges, excessive late fees, and administrative difficulty (long hold times and difficult channels of contact) to make it harder for you to pay them back. Why? So, they can make money. They lend $100 and they get paid $200 back. Our government created bankruptcy to protect you from these predatory lenders, and in order to give you a break when you are unable to pay your debt.
When you file bankruptcy, you are basically telling the court three things:
- I can’t afford to pay this debt anymore.
- I don’t have anything that you could sell in order to pay creditors (most of my clients are allowed to keep their house and cars).
- I am an honest person. I got this debt thinking I would be able to pay it back, but things happened and I couldn’t keep up.
If these three things apply to you, and you feel like you could say them to the court, bankruptcy was created for you. Bankruptcy can give you a new fresh start without creditor harassment.