Bankruptcy is a state of a person or a firm unable to pay off the debts. In legal terms, bankruptcy refers to the settlement of liabilities of a person/organization, fully or in parts, who are in a state of not able to meet the incurred financial obligations. The purpose of such a settlement is to uniformly distribute the bankrupt's assets equitably among the creditors, and, to relieve the debtor from further liability (in most cases). In the US, bankruptcy is governed by a federal law adopted in 1898 and amended many times, as by the Bankruptcy Reform Act of 1978 and recently in the spring of 2005.

The two purposes of bankruptcy are

- To give creditors a fair share of the money that one can afford to pay back. - To give the debtor, a fresh start by discharging his/her debts.

But bankruptcy, as one expects, has its drawbacks. But there are some limited advantages as well. Bankruptcy is more broad a term than finally putting an end to harassing debt collectors and creditors. Let us see few of the benefits that can be exploited out of a potential case of bankruptcy.

- First one is linked with the emotional and physical drain bankruptcy otherwise can cause on the bankrupt person. That is, there is complete relief from the harassment from creditors once a person has been declared bankrupt. Creditors' telephone calls, debt collection and car repossessions ceases and mortgage foreclosures and other law suits end as soon as one files for bankruptcy.

- And once a court declares one a bankrupt, a third party takes reign of the administration and he/she will handle the decision making and repayment of all the debts. Such a move is actually freeing the bankrupt person concerned from further stress.

- By a court declaring a person bankrupt, actually it is a statement to the creditors only to expect less money in the repayment deal.

- To an extent, that means less loss of money from the bankrupt's side than what had agreed upon in the individual voluntary agreement.

- Once discharged, all the overdue are written off. Once reached such a stage, the creditors cannot chase them.

- Bankruptcy restructures debts so that they are more manageable over time.

But there are certain debts that are not cleared by bankruptcy. This includes court fines, HECS debts, child support payments, debts incurred by fraud, student loans. Even after declaring one bankrupt, these dues need to be paid back in regular terms.

One can apply for bankruptcy when

1) He/she does not have enough financial backup to live on if all the monthly repayments that are required to make to the creditors are made.

2) He/she is on social security or on a low income i.e. less than $43,000 gross.

3) Does not have assets that could be traded to pay back the debt.

4) He/she is ready to live with the restriction on access to credit for 7 years.
About the Author

Jakob Jelling is the founder of http://www.cashbazar.com. Visit his website for the latest on personal finance, debt elimination, budgeting, credit cards and real estate.