By filing for and declaring oneself bankrupt, a debtor's relationship with his creditors is adjusted. Many of his debts are forgiven and he is also allowed to keep some properties labeled as exempt items. However, all of his valuable properties are sold off and the proceeds are distributed among his creditors. As a result, some of his debts can be paid in full or just partly. If most of his valuable properties (i.e. house, car) are named as collateral for any debt such as mortgage or a car loan, the proceeds from the selling of these items are used to pay these specific debts. Only the balance or excess is used to pay off the other debts. In a sense, bankruptcy fulfills two ojectives: it frees the debtor from paying his debts and ensures that all assets are distributed among the his creditors.
Bankruptcy happens in two ways: voluntary or involuntary. Declaring oneself bankrupt is categorized as voluntary whereas being forced into declaring bankruptcy by creditors is involuntary. Lawyers who specialize in finance cases advise debtors to cooperate in cases of involuntary declarations. There are also different types of being bankrupt. One is filing for a straight bankruptcy wherein all your properties are sold to pay off debts and the other is arranging for a repayment plan to avert foreclosure or repossession of properties. People whose debts are incurred by temporary setbacks (sickness, divorce) are usually considered for the partial type.
Although being bankrupt does lighten one's financial burden, it also has drawbacks. First, the debtor loses all control over his properties and assets. Any business the debtor owns is closed and all its employees are dismissed. Second, his credit accounts are closed such as loans, credit cards, and bank accounts. Also, bankruptcy remains in a person's credit history for 10 years which can seriously damage his credit reputation. Third, his bankrupt state is made public by advertisements in local papers. In addition, the bankrupt individual must inform every person he deals with about his bankrupt state unless after he is discharged. As a result, the bankrupt often faces hostility, or prejudices in terms of business or professional opportunities.
Finance experts generally recommend assessing financial situations before filing for bankruptcy. It is often the case that debtors declare bankruptcy without first exploring other options to settle their debts. However, if it is unavoidable, they advise debtors to seek professional help such as financial advisors or finance lawyers to help them understand the process and its effects. Debtors need to pay court application fees, but if they cannot afford it, there are non-profit legal aid organizations that are willing to help.