Though it is a common enough word, what exactly does bankruptcy mean? And what are its implications? As is to be expected, filing for bankruptcy is a complicated process but before such a step is taken it is essential to understand exactly what it is all about.

Simply put, bankruptcy can be defined as the legal process through which individuals or businesses who end up in financial trouble are able to work out their debts and pay them out under the protection of the bankruptcy court. Often “liquidations” or “reorganizations” are the words that are used to sum up the process that unfolds when you file for bankruptcy.

The two kinds of bankruptcy that you can file for are Chapter 7 and Chapter 13. There are various factors that would determine whether you should opt for Chapter 7 or Chapter 13. Through Chapter 7 Bankruptcy you can use liquidation, which literally means that you sell off property in order cover as much of the debt as possible, but at the same time you will have enough of the property left over in order for you to start all over again financially. On the other hand, the Chapter 13 Bankruptcy is the reorganization type of bankruptcy where the debtor is allowed three to five years over which to pay back the debts.