Bankruptcy is a court decree that declares organizations or individuals unable to pay their bills or debts, thus legally eliminating their obligation to settle outstanding liabilities. The court arrives at the decision after the judge and court trustee carefully examine and weigh the individual’s or business’s assets and liabilities. However, the court may not grant every request for bankruptcy; there are strict qualifications that one must meet when filing for bankruptcy.

Declaring bankruptcy is often a good way of starting on a clean slate after running into some serious commercial or personal financial problems. But what does it really mean? What happens when the court grants your request for bankruptcy?

Automatic stay

Automatic stay is a preliminary court decree that protects you from creditors and debt collectors once you file for bankruptcy. This decree remains until the bankruptcy proceedings finalize, after which the court may or may not declare you bankrupt. As long as the automatic stay holds, creditors and collectors should not call, threaten or send notices regarding your debts.


Once it declares you bankrupt, the court prevents creditors from collecting or claiming debts you previously incurred. The ruling clears unsecured liabilities such as credit card debts and other personal loans, but with a few exceptions. Personal discharge does not extend to some tax liabilities, child support, student loans, alimony and real estate loans. The court considers such debts too important to wipe clean, but in some cases, the court may provide opportunities for formulating feasible payment plans.

Clearing secured debt

Although you can wipe out secured debts through declaring bankruptcy, the court may require you to give up any assets securing such debts. For instance, if you secured a bank loan with your car, you may have to part with the vehicle as part or full settlement for the loan. In some cases, the court may order the liquidation of valuable assets that are not part of the collateral to clear secured debts.

Declaring bankruptcy is an effective way to get out of a personal financial crisis, particularly involving debts. However, you need to understand what you’re getting into when considering this move; there are many benefits and negative implications that may arise depending on the approach and timing.

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