What does it mean to file for bankruptcy?

Question

I keep hearing about this in commercials, but I am not sure what it means. Last time I heard, bankruptcy was a bad thing. So, why would anyone want to file for it?

Also, I hear it has something to do with embarrassment?

Please help me straighten this out.

Answer 1

Filing for bankruptcy is a legal way of proclaiming that you are unable to pay your bills/debts.  It generally is not a good thing but sometimes it must be filed for in order to allow the insolvent (a person who is racking up more in interest charges than they are able to pay) relief from creditors.

Say for example you had no money to pay your bills (hopefully not the case) and you owed money to me, Visa and your phone company.  I could continuously call you trying to get my money.  I could even hire other people to call you in an effort to improve my chances.  This could become annoying for you and because you will be bothered until this situation has been rectified.  You could be too embarrassed to do anything and just hope to win the lottery or somehow come by more money but likely this will not be the case.  The interest will continue the increase (in terms of payment amount owing) and you will continue to earn the same amount.

Generally people (aka lawyers) will help you to file for bankruptcy as a "service" to you.  In bankruptcy you pool all of your money/savings/assets together and use it to pay off those you owe money (me, visa and your phone company in my example).  If there is anything left you get the remainder.  There is a legal list to who gets first title to your assets if you are to become bankrupt.  Lawyers fees are near the top of the list so they will help ANYONE who is filing for bankruptcy as they are practically guaranteed their fees.

In summary, bankruptcy is a bad thing but it might be the only way out.  Lawyers will encourage you to file (through commercials) as they get their fees before most (if not all) creditors depending on your jurisdiction.

Answer 2

One files for bankrupty when they have gotten themselves into a position of biting off more than they can chew, i.e., spent more than they can afford.  

Yes it's bad, yes it is an embarrassment, and yes people do it all the time  =(

The lesson?  If you want something, save money until you have enough to pay for it so that you can say, "I don't owe anyone anything!"

Answer 3

Bankruptcy is the last resort when the amount you owe is more than you can pay back in the foreseeable future.  It is certainly not something to be taken lightly.  You are stiffing people and firms that you owe money.  

Some people think it is an easy way out but it wreaks havoc on your finances for years and years to come.

You are right that respectable folks are embarrassed to file bankruptcy but sometimes there are overwhelming circumstances, such as very high medical bills with no insurance, that make it necessary.