10 Pieces of Bankruptcy Information Everyone Should Know

Bankruptcy Is a Fresh Start, Not a Life Sentence
The U.S. Bankruptcy Court building in Tallahassee, Florida. Richard Cummins/Getty Images

Bankruptcy has such a strong negative connotation that many people think it's an actual crime. This confusion is exacerbated by the existence of U.S. bankruptcy courts, whose job is not to "prosecute" offending debtors, but to make sure that both debtors and creditors receive their due process under federal bankruptcy law.

In almost all cases, an individual or company files for bankruptcy voluntarily. It's not a court-mandated sentence for some other crime. Nobody is excited about declaring bankruptcy, but it's not a scarlet letter or a death sentence. In fact, it's a lifeline.

The goal of bankruptcy is to determine how much a debtor can reasonably pay to each creditor and to discharge or erase the remaining debt. Sure, the creditors won't get every cent they are owed, but it's better than nothing. The debtor doesn't get off scot-free, but he's not forced to dig his way out of a bottomless pit, either. In short, bankruptcy is a compromise.

Once you've settled your debts through bankruptcy proceedings, your creditors aren't allowed to hound you anymore. A bankruptcy will remain on your credit report for seven to 10 years, but after that, you'll have a clean slate [source: Michon].