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If someone were to file for (personal) bankruptcy protection from their creditors, is their entire debt wiped clean? And then they have seven years to wait before their credit history no longer reflects this? Surely there must be other downsides, otherwise why aren't more people doing this?

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    This is going to vary significantly by country. Which one are you interested in?
    – JohnFx
    Commented Jan 21, 2010 at 15:43
  • Could someone speak as if it no longer affects your score (but is still there) or if it is removed from your report altogether?
    – MrChrister
    Commented Jan 21, 2010 at 16:46

3 Answers 3

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Well, there is a social stigma associated with bankruptcy, so there is that.

As to your other questions, they are going to vary by country. I'll speak the what happens in the US.

There are multiple types of bankruptcy, only the following two are applicable to individuals. Regardless of the type, it can legally remain on your credit for 10 years, although some credit agencies only report them for 7.

Chapter 7: This is the one you referred to where they wipe almost all of your debts. As you would expect, debts to the Government (taxes) are excluded. This will obliterate your credit rating. Note: This often requires liquidating all of your assets first and paying off as much as you can.

Chapter 13: This is where you work out a plan to pay back everyone, but legally get everyone off your back by buying more time and sometimes reducing the amount owed. It is not as severe on your credit.

Up until a few years ago, you used to be able to choose which type of bankruptcy to file, but now I think the law requires that you file a general bankruptcy claim and the judge decides which is appropriate.

Here is a great article with more information on HowStuffWorks: Types of Bankruptcy
Here is an article on the effects on your credit rating: Credit after Bankruptcy

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    +1 Great info for U.S. consumers, very useful links.
    – Nat_Rea
    Commented Jan 21, 2010 at 18:08
  • The option still exists, you must "pass the means test" in order to file a chapter 7. Essentially you need income below the median income in your area, both "median income" and "area" are defined by the local rules.
    – quid
    Commented Sep 13, 2017 at 16:50
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One of the downsides is that a number of people have lent you money, expecting that you would pay it back. Bankruptcy is you saying "I'm not going to pay you back, even though I said I would".

The original intention of bankruptcy is that it is for those who have absolutely no hope of paying off the debt under any circumstances. If you are declaring bankruptcy for any other reason then you are essentially cheating your creditors. That may not be a downside for you, but it certainly is for them. Maybe this is what JohnFx means by "the social stigma associated with bankruptcy".

Note that I'm not talking here about the kinds of bankruptcy where you are given time to reorganize your finances, enabling you to pay back your debts in full - only the kind where you don't pay them back.

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    Well said. The downside is - or should be - shame.
    – JDelage
    Commented Dec 2, 2010 at 20:16
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    It has always seemed ironic to me that the same social stigma is not attached to companies that declare bankruptcy. For companies, it is simply a business decision, but people considering bankruptcy are supposed to consider their moral obligation to their creditors, when most if not all of their creditors are extremely large corporations for whom the debt is completely insignificant. The shame stigma of bankruptcy is a double standard. If we expect people to act 100% rational and be aware of the loans they entered into, then we can't shame them when they use bankruptcy to avoid them.
    – chrisfs
    Commented Jan 24, 2011 at 23:42
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    I would say anyone - person or corporation - who uses bankruptcy to avoid paying back a debt they could reasonably pay back is morally deficient. Commented Mar 23, 2011 at 21:23
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    @DJClayworth - in business, but also in life, having the ability to fall back and say, "well I tried but it didn't work out" and not be ruined is a benefit. It removes a barrier to trying something. If people thought starting your new business could end up costing you everything (and some moral shame to boot!) then fewer people would try, and we would all be worse off for the lack of competition and ideas in the market place.
    – MrChrister
    Commented Aug 24, 2011 at 21:51
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    When a creditor makes a loan, they take the risk of a bankruptcy, and are compensated for that risk with interest. If banks weren't making more money in interest than they lose in bankruptcies, they wouldn't be making loans. Ultimately, the costs of bankruptcies are borne by debtors through higher interest rates. Corporations are different from natural persons in that they concept of "personal", unsecured loan doesn't really apply to them; loans are made against their assets. Commented Sep 13, 2017 at 17:02
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If someone were to file for (personal) bankruptcy protection from their creditors, is their entire debt wiped clean?

Assuming U.S., not right now. JohnFx already discussed taxes. There is also the concern with private student loans. AFAIU, currently, the law (as of 2005) is that even with bankruptcy you are on the hook for your student loans, whether private or federal. I've heard the only thing that discharges the debt is the debtor's death, and even then I heard a story about the creditors coming after his parents.

That said, I also found a source that says in some cases "undue hardship" can be argued--in court, with no guarantee of it being granted--to discharge private student loan debt with bankruptcy.

I find this abhorrent. There are now two bills in committee in Congress to rectify this (and to make private student loan debt vulnerable to bankruptcy, at least with regards to private (non-govermental) student loans. See this article: http://www.usnews.com/education/blogs/student-loan-ranger/2011/06/22/congress-proposes-relief-for-student-loan-borrowers

There is also a great hour on student loans generally that addresses their special immunity to bankruptcy on On Point, a talk show from Boston: http://onpoint.wbur.org/2009/02/25/student-loans

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    The reason student loans became non-dischargeable is that it became routine for newly licensed doctors to declare bankruptcy after getting out of med school. The Federal government grew tired of dealing with this. Commented Aug 25, 2011 at 1:18
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    #duffbeer703 Do you have a source for that point about doctors?; I'd be interested in learning about that history. Unfortunately, in 2005 the law was amended to include all creditors, not just the federal government, so that original rationale doesn't apply with private creditors.
    – Chelonian
    Commented Aug 25, 2011 at 2:48
  • @duffbeer703 It's not just doctors. Effectively student loan debt is guaranteed by its protection from discharge in bankruptcy court because otherwise the debt would have to be underwritten. This levels the money playing field for students. It's hard enough to go from poor to college without having to pay 30% interest on your tuition.
    – quid
    Commented Dec 30, 2014 at 20:58

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